10-K 1 dd-12312016x10k.htm 10-K Document
                                                                

2016
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
ý
 
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
____________________________________________________________________________
Commission file number 1-815
E. I. DU PONT DE NEMOURS AND COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE
(State or Other Jurisdiction of Incorporation or Organization)
 
51-0014090
(I.R.S. Employer Identification No.)
974 Centre Road
Wilmington, Delaware 19805
(Address of principal executive offices)
Registrant's telephone number, including area code: 302-774-1000
Securities registered pursuant to Section 12(b) of the Act
(Each class is registered on the New York Stock Exchange, Inc.):
Title of Each Class
__________________________________________________
Common Stock ($.30 par value)
Preferred Stock
(without par value-cumulative)
$4.50 Series
$3.50 Series
No securities are registered pursuant to Section 12(g) of the Act.
_____________________________________________________
        Indicate by check mark whether the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act).    
Yes ý       No o
        Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes o       No ý
        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ý        No o
        Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes ý        No o
        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
        Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes o  No ý
        The aggregate market value of voting stock held by nonaffiliates of the registrant (excludes outstanding shares beneficially owned by directors and officers and treasury shares) as of June 30, 2016, was approximately $56.6 billion.
        As of January 31, 2017, 864,574,000 shares (excludes 87,041,000 shares of treasury stock) of the company's common stock, $0.30 par value, were outstanding.
Documents Incorporated by Reference
(Specific pages incorporated are indicated under the applicable Item herein):
 
 
Incorporated
By Reference
In Part No.
The company's 2017 Annual Meeting Proxy Statement to be filed within 120 days of the company's fiscal year ended December 31, 2016.
 
III
 


                                                                

E. I. du Pont de Nemours and Company
Form 10-K
Table of Contents
The terms "DuPont" or the "company" as used herein refer to E. I. du Pont de Nemours and Company and its consolidated subsidiaries, or to E. I. du Pont de Nemours and Company, as the context may indicate.
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Note on Incorporation by Reference
Information pertaining to certain Items in Part III of this report is incorporated by reference to portions of the company's definitive 2016 Annual Meeting Proxy Statement to be filed within 120 days after the end of the year covered by this Annual Report on Form 10-K, pursuant to Regulation 14A (the Proxy).

1


Part I

ITEM 1.  BUSINESS

DuPont was founded in 1802 and was incorporated in Delaware in 1915. Today, DuPont is helping customers find solutions to capitalize on areas of growing global demand — enabling more, safer, nutritious food; creating high-performance, cost-effective and energy efficient materials for a wide range of industries; and increasingly delivering renewably sourced bio-based materials and fuels. Total worldwide employment at December 31, 2016 was about 46,000 people. The company has operations in about 90 countries worldwide and 61 percent of consolidated net sales are made to customers outside the United States of America (U.S.). See Note 20 to the Consolidated Financial Statements for additional details on the location of the company's sales and property.

Subsidiaries and affiliates of DuPont conduct manufacturing, seed production or selling activities and some are distributors of products manufactured by the company. As a science and technology based company, DuPont competes on a variety of factors such as product quality and performance or specifications, continuity of supply, price, customer service and breadth of product line, depending on the characteristics of the particular market involved and the product or service provided. Most products are marketed primarily through the company's sales force, although in some regions, more emphasis is placed on sales through distributors. The company utilizes numerous suppliers as well as internal sources to supply a wide range of raw materials, energy, supplies, services and equipment. To ensure availability, the company maintains multiple sources for fuels and many raw materials, including hydrocarbon feedstocks. Large volume purchases are generally procured under competitively priced supply contracts.

DuPont Dow Merger of Equals
On December 11, 2015, DuPont and The Dow Chemical Company (Dow) announced entry into an Agreement and Plan of Merger (the Merger Agreement), under which the companies will combine in an all-stock merger of equals (the Merger Transaction) subject to satisfaction of customary closing conditions, including receipt of regulatory approval. Subject to the terms and conditions of the Merger Agreement, (i) Dow Merger Sub, a Delaware corporation that was formed on December 9, 2015, as a wholly owned subsidiary of DowDuPont Inc., a company jointly owned by Dow and DuPont, (DowDuPont) will be merged with and into Dow, with Dow surviving as a subsidiary of DowDuPont, (the Dow Merger), and (ii) DuPont Merger Sub, a Delaware corporation that was formed on December 9, 2015 as a wholly owned subsidiary of DowDuPont, will be merged with and into DuPont, with DuPont surviving the merger as a subsidiary of DowDuPont, (the DuPont Merger and, together with the Dow Merger, the Mergers). As a result of the Mergers, among other things, (a) DowDuPont will become the ultimate parent of Dow, DuPont and their respective subsidiaries and (b) existing Dow stockholders and DuPont stockholders will receive DowDuPont common stock, in accordance with the terms of the Merger Agreement.  On July 20, 2016, stockholders of both DuPont and Dow voted to approve all stockholder proposals necessary to complete the Merger Transaction at their respective special meetings. Following the consummation of the Merger Transaction, DuPont and Dow intend to pursue, subject to the receipt of approval by the Board of Directors of DowDuPont, the separation of the combined company’s agriculture business, specialty products business and material science business through a series of tax-efficient transactions (collectively, the Intended Business Separations).

Subject to the terms and conditions of the Merger Agreement, each share of common stock, par value $0.30 per share, of DuPont (DuPont Common Stock) issued and outstanding immediately prior to the Effective Time (as defined in the Merger Agreement), excluding any shares of DuPont Common Stock that are held in treasury, will be converted into the right to receive 1.2820 shares of common stock, par value $0.01 per share, of DowDuPont (DowDuPont Common Stock), for each share of DuPont Common Stock with cash in lieu of any fractional share of DowDuPont. Each share of DuPont Preferred Stock-$4.50 Series and DuPont Preferred Stock-$3.50 Series, in each case issued and outstanding immediately prior to the Effective Time, shall remain issued and outstanding and be unaffected by the merger.

Subject to the terms and conditions set forth in the Merger Agreement, at the Effective Time, each share of common stock, par value $2.50 per share, of Dow (the Dow Common Stock) issued and outstanding immediately prior to the Effective Time, excluding any shares of Dow Common Stock that are held in treasury, will be converted into the right to receive one share of DowDuPont Common Stock. Pursuant to the terms of the Merger Agreement, each share of Cumulative Convertible Perpetual Preferred Stock, Series A, par value $1.00 per share, of Dow (the Dow Preferred) issued and outstanding immediately prior to the Effective Time would be automatically canceled and each holder of shares of Dow Preferred would be deemed to hold the same number of shares of preferred stock of DowDuPont on equivalent terms. However, on December 30, 2016, (the Dow Preferred Conversion Date) each share of Dow Preferred was converted into 24.2010 shares of Dow Common Stock. In connection therewith, on the Dow Preferred Conversion date, Dow issued 96,804,000 shares of Dow Common Stock. As a result, it is expected that no shares of preferred stock of DowDuPont will be issued pursuant to the terms of the Merger Agreement at the Effective Time.


2


Part I
ITEM 1.  BUSINESS, continued

DuPont and Dow continue to work constructively with regulators in key jurisdictions to obtain approval and to prepare for closing as soon as possible after closing conditions have been met. Consummation of the Merger Transaction is contingent on satisfaction of customary closing conditions, including the receipt of regulatory approval from the U.S., European Union, China, Brazil and Canada. Subject to satisfaction of customary closing conditions, including the receipt of regulatory approvals, closing would be expected to occur in first half of 2017.

See the discussion entitled Merger Risks Part I, Item 1A, Risk Factors, and Part II, Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Note 2 to the Consolidated Financial Statements for further details and a discussion of some of the risks related to the transaction. Additional information about the Merger Transaction and the Merger Agreement is set forth in the definitive registration statement on Form S-4 (File No. 333-209869) (as amended, the Registration Statement) that includes a joint proxy statement of Dow and DuPont and that also constitutes a prospectus of DowDuPont and the company's Current Report on Form 8-K filed with the SEC on December 11, 2015.

Spin-off of Performance Chemicals
On July 1, 2015, DuPont completed the separation of its Performance Chemicals segment through the spin-off of all of the issued and outstanding stock of The Chemours Company (Chemours). In connection with the separation, the company and Chemours entered into a Separation Agreement and a Tax matters Agreement as well as certain ancillary agreements. In accordance with generally accepted accounting principles in the U.S. (GAAP), the financial position and results of operations of the Performance Chemicals segment are presented as discontinued operations and, as such, have been excluded from continuing operations and segment results for all periods presented. Additional details regarding the separation and other related agreements can be found in Note 3 to the Consolidated Financial Statements.

Productivity and Cost Savings Initiatives
On December 11, 2015, DuPont announced a 2016 global cost savings and restructuring plan designed to reduce $730 million in costs in 2016 compared with 2015, which represents a reduction of operating costs on a run-rate basis of about $1.0 billion by end of 2016. As part of the plan, the company committed to take structural actions across all businesses and staff functions globally to operate more efficiently by further consolidating businesses and aligning staff functions more closely with them.  In connection with the restructuring actions, the company recorded a pre-tax charge to earnings of $798 million in the fourth quarter 2015, comprised of $656 million of severance and related benefit costs, $109 million of asset related charges, and $33 million of contract termination costs. The restructuring actions associated with the charge are substantially complete and the plan delivered the target cost reductions in 2016 versus prior year. Additional details related to this plan can be found in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, on page 24 of this report and Note 4 to the Consolidated Financial Statements.

In June 2014, DuPont announced its global, multi-year initiative to redesign its global organization and operating model to reduce costs and improve productivity and agility across all businesses and functions.  DuPont commenced a restructuring plan to realign and rebalance staff function support, enhance operational efficiency, and to reduce residual costs associated with the separation of its Performance Chemicals segment. Cost reductions from the 2014 operational redesign were essentially completed during 2015 and for full year 2015, the company delivered incremental cost savings of approximately $440 million year over year. Additional details related to this plan can be found in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, on page 24 of this report and Note 4 to the Consolidated Financial Statements.

Business Segments
The company consists of 7 businesses which are aggregated into 6 reportable segments based on similar economic characteristics, the nature of the products and production processes, end-use markets, channels of distribution and regulatory environment. The company's reportable segments are Agriculture, Electronics & Communications, Industrial Biosciences, Nutrition & Health, Performance Materials and Protection Solutions. The company includes certain businesses not included in the reportable segments, such as pre-commercial programs, nonaligned businesses and pharmaceuticals in Other. Additional information with respect to business segment results is included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, on page 31 of this report and Note 21 to the Consolidated Financial Statements.

Effective January 1, 2016, the DuPont Packaging & Industrial Polymers business consolidated with the DuPont Performance Polymers business within the Performance Materials segment, and the DuPont Protection Technologies business consolidated with the DuPont Building Innovations business within the former Safety & Protection segment (now Protection Solutions). The consolidations were undertaken to create greater efficiency and enhanced capabilities in the two segments where these businesses operate. These changes did not result in a change in reportable segments.

3


Part I
ITEM 1.  BUSINESS, continued

DuPont Sustainable Solutions, previously within the company's former Safety & Protection segment (now Protection Solutions), was comprised of two business units: clean technologies and consulting solutions. Effective January 1, 2016, the clean technologies business unit became part of the Industrial Biosciences segment with the focus on working with customers to improve the performance, productivity and sustainability of their products and processes. The company is exploring a range of options to maximize the growth of the consulting solutions business unit which effective January 1, 2016 is reported within Other.

Agriculture
Agriculture businesses, DuPont Pioneer (Pioneer) and DuPont Crop Protection (Crop Protection), leverage the company's technology, customer relationships and industry knowledge to improve the quantity, quality and safety of the global food supply and the global production agriculture industry. Land available for worldwide agricultural production is increasingly limited so production growth will need to be achieved principally through improving crop yields and productivity rather than through increases in planted area. The segment's businesses deliver a broad portfolio of products and services that are specifically targeted to achieve gains in crop yields and productivity, including Pioneer® brand seed products and well-established brands of insecticides, fungicides and herbicides. Research and development focuses on leveraging technology to increase grower productivity and to enhance the value of grains and oilseeds through improved seed traits, superior seed germplasm and effective use of insecticides, herbicides and fungicides. Agriculture accounted for 57 percent of the company's total research and development expense in 2016.

Sales of the company's products in this segment are affected by the seasonality of global agriculture markets and weather patterns. Sales and earnings performance in the Agriculture segment are significantly stronger in the first versus second half of the year reflecting the northern hemisphere planting season. As a result of the seasonal nature of its business, Agriculture's inventory is at its highest level at the end of the calendar year and is sold down in the first and second quarters. Trade receivables in the Agriculture segment are at a low point at year-end and increase through the northern hemisphere selling season to peak at the end of the second quarter.

Pioneer is a world leader in developing, producing and marketing hybrid corn seed and soybean seed varieties which improve the productivity and profitability of its customers. Additionally, Pioneer develops, produces and markets canola, sunflower, sorghum, wheat and rice seed, as well as silage inoculants. As the world's population grows and the middle class expands, the need for crops for animal feed, food, biofuels and industrial uses continues to increase. The business competes with other seed and plant biotechnology companies. Pioneer seed sales amounted to 27 percent of the company's total consolidated net sales for the years ended December 31, 2016, 2015 and 2014.

Pioneer's research and development focuses on integrating high yielding germplasm with value added proprietary and/or licensed native and biotechnology traits with local environment and service expertise. Pioneer uniquely develops integrated products for specific regional application based on local product advancement and testing of the product concepts. Research and development in this arena requires long-term commitment of resources, extensive regulatory efforts and collaborations, partnerships and business arrangements to successfully bring products to market. To protect its investment, the business employs the use of patents covering germplasm and native and biotechnology traits in accordance with country laws. Pioneer holds multiple long-term biotechnology trait licenses from third parties as a normal course of business. The biotechnology traits licensed by Pioneer from third parties are contained in a variety of Pioneer crops, including corn hybrids and soybean varieties. The majority of Pioneer’s corn hybrids and soybean varieties sold to customers contain biotechnology traits licensed from third parties under these long term licenses.
            
Pioneer is actively pursuing the development of innovations for corn hybrids, soybean varieties, and canola, sunflower, wheat and rice seed based on market assessments of the most valuable opportunities. In corn seeds, programs include innovations for insect protection, drought, yield and yield stability. In soybean seeds, programs include products with enhanced end-use value and insect protection.

Pioneer has seed production facilities located throughout the world. Seed production is performed directly by the business or contracted with independent growers and conditioners. Pioneer's ability to produce seeds primarily depends upon growing conditions and availability of reliable contract growers.

Pioneer markets and sells seed product primarily under the Pioneer® brand but also sells and distributes products utilizing additional brand names. Pioneer promotes its products through multiple marketing channels around the world. In the corn and soybean markets of the U.S. Corn Belt, Pioneer® brand products are sold primarily through a specialized force of independent sales representatives. Outside of North America, Pioneer's products are marketed through a network of subsidiaries, joint ventures and independent producer-distributors.


4


Part I
ITEM 1.  BUSINESS, continued

Crop Protection serves the global production agriculture industry with crop protection products for field crops such as wheat, corn, soybean and rice and specialty crops such as fruit, nut, vine and vegetables. Principle crop protection products are weed control, disease control and insect control offerings for foliar application or as a seed treatment. Crop Protection products are marketed and sold to growers and other end users through a network of wholesale distributors and crop input retailers. Sales for the business' insect control portfolio is led by DuPontTM Rynaxypyr® insecticide, a product that is used across a broad range of core agricultural crops.

The major commodities, raw materials and supplies for the Agriculture segment include: benzene derivatives, other aromatics and carbamic acid related intermediates, corn and soybean seeds, insect control products, natural gas and seed treatments.

Agriculture net sales outside the U.S. accounted for 51 percent of the segment's total sales in 2016.

Electronics & Communications
Electronics & Communications (E&C) is a leading supplier of differentiated materials and systems for consumer electronics, photovoltaics (PV), displays and advanced printing that enable superior performance and lower total cost of ownership for customers. The segment leverages the company's strong materials and technology base to target attractive growth opportunities in circuit and semiconductor fabrication and packaging materials, PV materials, display materials, packaging graphics, and digital printing.
In the consumer electronics market, E&C materials add value across multiple devices, with growth driven largely by smart phones. The segment has a portfolio of materials for semiconductor fabrication and packaging, as well as innovative materials for circuit applications, to address critical needs of electronic component and device manufacturers. In the growing PV market, E&C is an industry-leading innovator and supplier of metallization pastes and backsheet materials that improve the efficiency and lifetime of solar cells and solar modules. Solar modules, which are made up of solar cells and other materials, are installed to generate power. DuPont is a leading global supplier of materials to the PV industry. In packaging graphics, E&C is a leading supplier of flexographic printing systems, including Cyrel® photopolymer plates and platemaking systems, and is investing in new products to strengthen its market leadership position. The segment supplies pigmented inks used in digital printing applications for textile, commercial and home-office use. In the displays market, E&C has developed solution-process technology, which it licenses for active matrix organic light emitting diode (AMOLED) television displays.
The major commodities, raw materials and supplies for E&C include: acrylic monomers, acetoxystyrene monomer, black and color pigments, styrenic block copolymers, color dyes, copper foil, difluoroethane, diglycolamine, DMAC, hydroxylamine, monomers and polymer resins, oxydianiline, polyester film, polymer films, precious metals and pyromellitic dianhydride.
E&C net sales outside the U.S. accounted for 79 percent of the segment's total sales in 2016.

Industrial Biosciences
Industrial Biosciences is a leader in developing and manufacturing a broad portfolio of bio-based products. The segment's enzymes add value and functionality to processes and products across a broad range of markets such as animal nutrition, detergents, food manufacturing, ethanol production and industrial applications. The result is cost and process benefits, better product performance and improved environmental outcomes. Industrial Biosciences also makes DuPontTM Sorona® PTT renewably sourced polymer for use in carpet and apparel fibers. In addition, the clean technologies business unit provides offerings that help reduce sulfur and other emissions, formulate cleaner fuels, and dispose of liquid waste.
 
The segment includes a joint venture with Tate & Lyle PLC, DuPont Tate & Lyle Bio Products Company, LLC, to produce BioPDOTM 1,3 propanediol using a proprietary fermentation and purification process. BioPDOTM is the key building block for DuPontTM Sorona® PTT polymer.
The major commodities, raw materials and supplies for the Industrial Biosciences segment include: terephthalic acid, processed grains (including dextrose and glucose), and glycols.
Industrial Biosciences net sales outside the U.S. accounted for 59 percent of the segment's total sales in 2016.


5


Part I
ITEM 1.  BUSINESS, continued

Nutrition & Health
Nutrition & Health offers a wide range of sustainable, bio-based ingredients, providing innovative solutions for specialty food ingredients, food nutrition, health and safety. The segment's product solutions include the wide-range of DuPont Danisco® food ingredients such as cultures and probiotics, notably Howaru®, emulsifiers, texturants, natural sweeteners such as Xivia® and Supro®soy-based food ingredients. These ingredients hold leading market positions based on industry leading innovation, knowledge and experience, relevant product portfolios and close-partnering with the world's food manufacturers. Nutrition & Health serves various end markets within the food industry including dairy, bakery, meat and beverage segments. Nutrition & Health has research, production and distribution operations around the world.
  
Nutrition & Health products are marketed and sold under a variety of brand names and are distributed primarily through its direct route to market. The direct route to market focuses on strong customer collaborations and insights with multinational customers and regional customers alike.

The major commodities, raw materials and supplies for the Nutrition & Health segment include: cellulose, gelatin, glycerol, guar, organic oils, peels, saccharides, seaweed, soybeans, sugars and yeasts.

In November 2016, DuPont announced an investment to expand probiotics production capacity in the United States. The investment is the second phase of a broader probiotics expansion project due to the rapidly growing global demand for probiotics. Phase one, supporting current growth, is ongoing in Madison, Wis., and Rochester, N.Y., and is partially complete as of the end of 2016. The second phase is scheduled to span two-years, represents an investment of approximately $100 million, and increases the company’s probiotics production capacity by an additional 70 percent. Production will be optimized with the installation of new, high-volume fermenters and other processing equipment.

In December 2016, DuPont and Hygenia LLC announced an agreement to sell DuPont's global food safety diagnostic business to Hygenia LLC. The transaction is expected to close in the first half of 2017, pending satisfaction of customary closing conditions, including receipt of regulatory approval.

Nutrition & Health net sales outside the U.S. accounted for 66 percent of the segment's total sales in 2016.

Performance Materials
DuPont Performance Materials (Performance Materials) provides its customers with innovative polymer science solutions and expert application development assistance to enhance the performance, reduce the total system cost and optimize the sustainability of their products. Solutions include productive, higher performance polymers, elastomers, films, parts, and systems and solutions which improve the uniqueness, functionality and profitability of its customers' offerings. Key market segments include automotive and transportation, packaging for food and beverages, electrical/electronic components, material handling, healthcare, construction, semiconductor and aerospace. The segment has several large customers, primarily in the motor vehicle OEM industry supply chain. The company has long-standing relationships with these customers and they are considered to be important to the segment's operating results.

Performance Materials product portfolio includes elastomers and thermoplastic and thermoset engineering polymers which are used by customers to fabricate components for mechanical, chemical and electrical systems. The main products include: DuPontTM Zytel® long chain nylon polymers, Zytel® HTN nylon resins, Zytel® nylon resins, Crastin® PBT polymer resins, Rynite® PET polymer resins, Delrin® acetal resins, Hytrel® polyester thermoplastic elastomer resins, Vespel® parts and shapes, Vamac® ethylene acrylic elastomer and Kalrez® perfluoroelastomer.

Performance Materials also specializes in resins and films used in packaging and industrial polymer applications, sealants and adhesives and sporting goods. Key brands include: DuPontTM Surlyn® ionomer resins, Bynel® coextrudable adhesive resins, Elvax® EVA resins, Nucrel® Elvaloy®polymer modifiers and Elvaloy® copolymer resins. Performance Materials product portfolio also includes the DuPont Teijin Films joint venture, whose primary products are Mylar® and Melinex® polyester films.

In November 2013, DuPont entered into a definitive agreement to sell Glass Laminating Solutions/Vinyls (GLS/Vinyls) to Kuraray Co. Ltd. In June 2014, the sale was completed which resulted in a pre-tax gain of $391 million ($273 million net of tax). The gain was recorded in other income, net in the company's Consolidated Income Statement for the year ended December 31, 2014. GLS/Vinyls specializes in interlayers for laminated safety glass and its key brands include SentryGlas® and Butacite® laminate interlayers.


6


Part I
ITEM 1.  BUSINESS, continued

The major commodities, raw materials and supplies for the Performance Materials segment include: acetic acid, acrylic monomers, adipic acid, butanediol, dimethyl terephthalate, dodecanedioic acid, ethane, fiberglass, hexamethylene diamine, methanol, methacrylic acid, methylacrylate, natural gas, paraxylene, perfluoromethylvinyl ether, polytetramethylene glycol, polyethylene, polyolefin resin,purified terephthalic acid, and vinyl acetate monomer.

Performance Materials net sales outside the U.S. accounted for 71 percent of the segment's total sales in 2016.

Protection Solutions
Protection Solutions satisfies the growing global needs of businesses, governments, and consumers for solutions that make life safer, healthier, and more secure. By uniting market-driven science with the strength of highly regarded brands, the segment delivers products to a broad array of markets, including, industrial, construction, consumer, military and law enforcement, automotive, aircraft, and energy. Protection Solutions is also investing in future growth initiatives such as protection of perishable and temperature-sensitive food and pharmaceutical products and roofing underlayment.
With highly recognized brands like DuPont™ Kevlar® high-strength material, Nomex® thermal-resistant material, and Tyvek® protective material, the business has a broad portfolio of industry leading solutions for applications such as: aerospace, life protection, personal protection, medical packaging, graphics, and protection and energy efficiency of buildings. DuPont™ Corian®, Montelli®, and Zodiaq® solid surfaces offer durable, functional, and aesthetically appealing materials for residential and commercial interior and exterior applications.
The major commodities, raw materials, and supplies for the Protection Solutions segment include: alumina trihydrate, aniline, benzene, calcium chloride, carbon monoxide, chlorine, high-density polyethylene, isophthalic acid, metaphenylenediamine, methyl methacrylate, polyester resin, polypropylene, quartz, sulfuric acid, and terephthalic acid.
Protection Solutions net sales outside the U.S. accounted for 56 percent of the segment's total sales in 2016.
Backlog
In general, the company does not manufacture its products against a backlog of orders and does not consider backlog to be a significant indicator of the level of future sales activity. Production and inventory levels are based on the level of incoming orders as well as projections of future demand. Therefore, the company believes that backlog information is not material to understanding its overall business and should not be considered a reliable indicator of the company's ability to achieve any particular level of revenue or financial performance.

Intellectual Property
As a science and technology based company, DuPont believes that securing intellectual property is an important part of protecting its research. Some DuPont businesses operate in environments in which the availability and protection of intellectual property rights affect competition. Information on the importance of intellectual property rights to Pioneer is included in Item 1 Agriculture business discussion beginning on page 4 of this report.

Trade secrets are an important element of the company's intellectual property. Many of the processes used to make DuPont products are kept as trade secrets which, from time to time, may be licensed to third parties. DuPont vigilantly protects all of its intellectual property including its trade secrets. When the company discovers that its trade secrets have been unlawfully taken, it reports the matter to governmental authorities for investigation and potential criminal action, as appropriate. In addition, the company takes measures to mitigate any potential impact, which may include civil actions seeking redress, restitution and/or damages based on loss to the company and/or unjust enrichment.

Patents & Trademarks: DuPont continually applies for and obtains U.S. and foreign patents and has access to a large patent portfolio, both owned and licensed. DuPont’s rights under these patents and licenses, as well as the products made and sold under them, are important to the company in the aggregate. The protection afforded by these patents varies based on country, scope of individual patent coverage, as well as the availability of legal remedies in each country. This significant patent estate may be leveraged to align with the company’s strategic priorities within and across segments. At December 31, 2016, the company owned about 6,500 active U.S. patents and about 10,000 active patents outside of the U.S., of which about 55 and 30 percent, respectively, relate to the Agriculture segment.


7


Part I
ITEM 1.  BUSINESS, continued

Remaining life of granted patents owned as of December 31, 2016:
 
U.S.

Other Countries

Within 5 years
1,400

1,900

6 to 10 years
1,600

4,100

11 to 16 years
2,400

3,700

16 to 20 years
1,100

300

Total
6,500

10,000

In addition to its owned patents, the company owns over 8,300 patent applications.

The company owns or licenses many trademarks that have significant recognition at the consumer retail level and/or business to business level. Ownership rights in trademarks do not expire if the trademarks are continued in use and properly protected.

Research and Development
DuPont’s investment in research and development (R&D) was $1.6 billion in 2016, $1.9 billion in 2015 and $2.0 billion in 2014. DuPont conducts R&D activities to renew our portfolio, create new product lines, and transform markets to deliver results in the short, mid and long term. Each business in the company directs R&D activities that support its business objectives, and the company supports cross-business and cross-functional investment to incubate new science-intensive growth opportunities additive to the existing business portfolios. The R&D portfolio is managed by senior business and R&D leaders to ensure consistency with the corporate and business strategies and to capitalize on the application of emerging science. DuPont’s R&D leverages the company's unique world-class science, technology and engineering capabilities, deep understanding of markets and value chains, and research collaborations, to drive revenue and profit growth.

The company protects its R&D investment through its intellectual property strategy.  See discussion under “Intellectual Property” beginning on page 7.

Additional information with respect to R&D related to Agriculture is included on page 4.

Environmental Matters
Information related to environmental matters is included in several areas of this report: (1) Environmental Proceedings beginning on page 18, (2) Management's Discussion and Analysis of Financial Condition and Results of Operations beginning on pages 43, 48-50 and (3) Notes 1 and 15 to the Consolidated Financial Statements.

Available Information
The company is subject to the reporting requirements under the Securities Exchange Act of 1934. Consequently, the company is required to file reports and information with the Securities and Exchange Commission (SEC), including reports on the following forms: annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934.

The public may read and copy any materials the company files with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

The company's annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are also accessible on the company's website at http://www.dupont.com by clicking on the section labeled "Investors", then on "Filings & Reports" and then on "SEC Filings." These reports are made available, without charge, as soon as is reasonably practicable after the company files or furnishes them electronically with the SEC.

Executive Officers of the Registrant
Information related to the company's Executive Officers is included in Item 10, Directors, Executive Officers and Corporate Governance, beginning on page 53 of this report.

8


Part I
ITEM 1A.  RISK FACTORS

Risks relating to the Mergers
The risk factors below should be read in conjunction with the risk factors and other information related to the Mergers set forth in the Registration Statement and the risk factors related to the company’s operations set forth below as well as the other information contained in this report.

Regulatory approvals may not be received, may take longer than expected or may impose conditions that are not presently anticipated or that cannot be met.
Before the Mergers may be completed, various approvals, authorizations and declarations of non-objection must be obtained from certain regulatory and governmental authorities. Subject to the terms and conditions of the Merger Agreement, Dow and DuPont have each agreed to use their reasonable best efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with each other in doing, all things necessary, proper or advisable to consummate and make effective, as soon as possible following the date of the Merger Agreement, the Mergers and the other transactions contemplated by the Merger Agreement. For purposes of the foregoing, "reasonable best efforts" includes (i) the sale, divestiture or disposition of such assets or businesses of either party or its subsidiaries or affiliates and (ii) restrictions or actions that after the Effective Time would limit DowDuPont's or its subsidiaries' or affiliates' freedom of action or operations with respect to retaining, or its ability to retain, one or more of its or its subsidiaries' businesses, product lines or assets. These regulatory and governmental entities may impose conditions on the granting of such approvals and if such regulatory and governmental entities seek to impose such conditions, lengthy negotiations may ensue among such regulatory or governmental entities, DuPont and Dow. Such conditions and the process of obtaining regulatory approvals could have the effect of delaying completion of the Mergers and such conditions may not be satisfied for an extended period of time. Such conditions may also impose additional costs or limitations on the combined company following the completion of the Mergers, including the requirement that the respective Dow and DuPont businesses divest certain assets if necessary in order to obtain certain regulatory approvals, and may limit the ability of the combined company to integrate parts of the DuPont and Dow businesses and negatively impact the ultimate composition of the entities we expect to constitute in connection with the Intended Business Separations. These conditions may therefore reduce the anticipated benefits of the Mergers, which could also have a material adverse effect on the combined company’s business and cash flows and results of operations, and DuPont cannot predict what, if any, changes may be required by regulatory or governmental authorities whose approvals are required. The regulatory approvals may not be received at all, may not be received in a timely fashion, and may contain conditions on the completion of the Mergers.

DuPont or Dow may waive one or more of the closing conditions without re-soliciting stockholder approval.
DuPont or Dow may determine to waive, in whole or in part, one or more of the conditions to its obligations to consummate the Mergers. DuPont or Dow currently expect to evaluate the materiality of any waiver and its effect on DuPont stockholders or Dow stockholders, as applicable, in light of the facts and circumstances at the time to determine whether any amendment of the Registration Statement or any re-solicitation of proxies or voting cards is required in light of such waiver. Any determination whether to waive any condition to the Mergers or as to re-soliciting stockholder approval or amending the Registration Statement as a result of the waiver will be made by DuPont or Dow, as applicable, at the time of such waiver based on the facts and circumstances as they exist at that time.

The Merger Agreement may be terminated in accordance with its terms and the Mergers may not be completed.
The completion of the Mergers is subject to the satisfaction or waiver of a number of conditions. Those conditions include: (i) the receipt of certain domestic and foreign regulatory approvals under competition laws, including the termination or expiration of the waiting period under the HSR Act; (ii) the absence of certain governmental restraints or prohibitions preventing completion of the DuPont Merger or the Dow Merger; (iii) the approval of the shares of DowDuPont Common Stock to be issued to DuPont stockholders and Dow stockholders for listing on the NYSE; (iv) the reasonable determination by DuPont and Dow that neither the DuPont Merger nor the Dow Merger will constitute an acquisition of a 50 percent or greater interest in Dow or DuPont, under Section 355(e) of the Code; (v) the truth and correctness of the representations and warranties made by both parties (generally subject to certain “materiality” and “material adverse effect” qualifiers); (vi) the performance by DuPont and Dow of their respective obligations under the Merger Agreement in all material respects; and (vii) the receipt by both parties of legal opinions from their respective tax counsels with respect to the tax-free nature of each of the Mergers.


9


Part I
ITEM 1A.  RISK FACTORS, continued

These conditions to the closing may not be fulfilled and, accordingly, the Mergers may not be completed. In addition, if the Mergers are not completed by March 15, 2017 (subject to extension to June 15, 2017, by either party if certain antitrust-related conditions to the closing have not been satisfied), either DuPont or Dow may choose not to proceed with the Mergers, and the parties can mutually decide to terminate the Merger Agreement at any time prior to the consummation of the Mergers. In addition, DuPont or Dow may elect to terminate the Merger Agreement in certain other circumstances. If the Merger Agreement is terminated, Dow and DuPont may incur substantial fees in connection with termination of the Merger Agreement and will not recognize the anticipated benefits of the Mergers.

Termination of the Merger Agreement could negatively impact DuPont.
If the Merger Agreement is terminated in accordance with its terms and the Mergers are not consummated, the ongoing businesses of DuPont may be adversely affected by a variety of factors. DuPont's respective businesses may be adversely impacted by the failure to pursue other beneficial opportunities during the pendency of the Mergers, by the failure to obtain the anticipated benefits of completing the Mergers, by payment of certain costs relating to the Mergers, and by the focus of DuPont's management on the Mergers for an extended period of time rather than on management opportunities or other issues. The market price of DuPont common stock might decline as a result of any such failures to the extent that the current market prices reflect a market assumption that the Mergers will be completed.

In addition, if the Merger Agreement is terminated under certain circumstances, DuPont or Dow may be required to pay a termination fee of $1.9 billion to the other party, depending on the circumstances surrounding the termination. DuPont may also be negatively impacted if the Merger Agreement is terminated and it seeks but is unable to find another business combination or strategic transaction offering equivalent or more attractive consideration than the consideration to be provided in the Mergers, or if DuPont becomes subject to litigation related to entering into or failing to consummate the Mergers, including direct actions by DuPont stockholders against the directors and/or officers of DuPont for breaches of fiduciary duty, and stockholder derivative actions.


There can be no assurance that the expected benefits of the Mergers, including the Intended Business Separations, will occur or be fully or timely realized.
The success of the Mergers will depend, in part, on the combined company’s ability to successfully combine the businesses of DuPont and Dow. If the combined company is not able to successfully combine the businesses of DuPont and Dow in an efficient and effective manner, including if the Intended Business Separations are delayed or ultimately not consummated, the anticipated benefits, synergies, operational efficiencies and cost savings may not be realized fully or at all, or may take longer to realize than expected, and the value of common stock, the revenues, levels of expenses and results of operations of the combined company may be adversely affected.

The combination of two independent businesses is a complex, costly and time consuming process, and the management of the combined company may face significant challenges in implementing such integration, including, without limitation:

latent impacts resulting from the diversion of management’s attention from ongoing business concerns as a result of the devotion of management’s attention to the Mergers and resulting performance shortfalls;
ongoing diversion of the attention of management from the operation of the combined company’s business as a result of the Intended Business Separations;
difficulties in achieving anticipated cost savings, synergies, business opportunities and growth prospects;
difficulties in managing a larger combined company addressing differences in business culture and retaining key personnel;
the possibility of faulty assumptions underlying expectations regarding the integration process, including with respect to the Intended Business Separations;
unanticipated issues in integrating information technology, communications programs, financial procedures and operations, and other systems, procedures and policies;
unanticipated changes in applicable laws and regulations;
managing tax costs or inefficiencies associated with integrating the operations of the combined company and the Intended Business Separations;
coordinating geographically separate organizations; and unforeseen expenses or delays associated with the Mergers.


10


Part I
ITEM 1A.  RISK FACTORS, continued

Some of these factors will be outside of the control of management and any one of them could result in increased costs and diversion of management’s time and energy, as well as decreases in the amount of expected revenues which could materially impact the company’s business, financial conditions and results of operations. The integration process and other disruptions resulting from the Mergers may also adversely affect the combined company’s relationships with employees, suppliers, customers, distributors, licensors and others with whom DuPont and Dow have business or other dealings, and difficulties in integrating the businesses or regulatory functions of DuPont and Dow could harm the reputation of the combined company.

If the combined company is not able to successfully combine the businesses of DuPont and Dow in an efficient, cost-effective and timely manner, the anticipated benefits and cost savings of the Mergers (including the Intended Business Separations) may not be realized fully, or at all, or may take longer to realize than expected, and the value of DowDuPont common stock, the revenues, levels of expenses and results of operations may be affected adversely. If the combined company is not able to adequately address integration challenges, the combined company may be unable to integrate successfully DuPont’s and Dow’s operations, effect the Intended Business Separations or to realize the anticipated benefits of the transactions.

DuPont will be subject to business uncertainties and contractual restrictions until the Mergers are consummated.
Uncertainty about the completion or effect of the Mergers on employees, suppliers, customers, distributors, licensors and licensees as well as regulatory permits, licenses, contracts and other agreements, particularly for which the Mergers could be deemed a “change-in-control” under the applicable  terms and conditions may have an adverse effect on DuPont, Dow and consequently on the combined company. Changes to existing business relationships, including termination or modification, could negatively affect each of DuPont’s and/or Dow's revenues, earnings and cash flow, as well as the market price of its common stock. These uncertainties may impair each party’s ability to attract, retain and motivate key personnel until the consummation of the Mergers, and could cause suppliers, customers and others that deal with the parties to seek to change existing business relationships with them. Retention of employees could be challenging during the pendency of the Mergers due to uncertainty about their future roles. If key employees depart because of issues related to the uncertainty and difficulty of integration or a desire not to remain with the businesses, the combined company’s business following the consummation of the Mergers could be negatively impacted. Further, no assurance can be given that the combined company will be able to attract or retain key management personnel and other key employees of DuPont and Dow to the same extent that DuPont and Dow have previously been able to attract or retain their employees.

In addition, the Merger Agreement restricts each of DuPont and Dow, without the consent of the other party, from making certain acquisitions and divestitures, entering into certain contracts, incurring certain indebtedness and expenditures, paying dividends in excess of certain thresholds, repurchasing or issuing securities outside of existing share repurchase and equity award programs, and taking other specified actions until the earlier of the completion of the Mergers or the termination of the Merger Agreement. These restrictions may prevent or delay pursuit of strategic corporate or business opportunities that may arise prior to the consummation of the Mergers. Adverse effects arising during the pendency of the Mergers could be exacerbated by any delays in consummation of the Mergers or termination of the Merger Agreement.

Inability to access the debt capital markets could impair DuPont's liquidity, business or financial condition.
DuPont has relied and continues to rely on access to the debt capital markets to finance its day-to-day and long-term operations. In connection with the Mergers, Dow and DuPont do not intend for DowDuPont to incur debt obligations or guarantee the debt obligations of Dow or DuPont.
 
Any limitation on DuPont’s ability to raise money in the debt markets could have a substantial negative effect on its liquidity. Access to the debt capital markets in amounts adequate to finance DuPont's activities could be impaired as a result of the existence of material nonpublic information about the Intended Business Separations and other potential factors, including factors that are not specific to DuPont, such as a severe disruption of the financial markets and interest rate fluctuations.

DuPont expects to incur substantial transaction-related costs in the connection with the Mergers.
DuPont expects to incur significant costs, expenses and fees for professional services and other transaction costs in connection with the transaction. During the years ended December 31, 2016 and 2015, the company incurred transaction-related costs of $386 million and $10 million, respectively. The substantial majority of these costs are and will continue to be expenses relating to the Mergers and the Intended Business Separations, including costs relating to integration and separation planning. These costs could adversely affect the financial condition and results of operation of DuPont prior to the Mergers and of the combined company following the Mergers.



11


Part I
ITEM 1A.  RISK FACTORS, continued

The determination to proceed with the Intended Business Separations will not be made at the time of the consummation of the Mergers, and the expected benefits of such transactions, if they occur, will be uncertain.
In connection with the Mergers, Dow and DuPont have announced their intention that the combined company will pursue the separation of the combined company’s agriculture business, material science business and specialty products business through one or more tax-efficient transactions, resulting in three independent, publicly traded companies. However, consummation of the Mergers is not conditioned on the Intended Business Separations, and the determination as to whether to pursue such transactions will be made by the DowDuPont Board following the consummation of the Mergers. Following the consummation of the Mergers, the DowDuPont Board may ultimately determine to abandon one or more of the Intended Business Separations, and such determination could have an adverse impact on the value of the combined company. Additionally, there are many determinations with respect to the Intended Business Separations that, by their nature, cannot be determined until the completion of the Mergers, including definitive determinations with regard to the capital structure of the various businesses and allocation of liabilities among them. As such, there are many factors that could, through the closing and prior to the determination by the DowDuPont Board to proceed with the Intended Business Separations, impact the structure or timing of, the anticipated benefits from, or determination to ultimately proceed with, the Intended Business Separations, including, among others, global economic conditions, instability in credit markets, declining consumer and business confidence, fluctuating commodity prices and interest rates, volatile exchange rates, tax considerations, and other challenges that could affect the global economy, specific market conditions in one or more of the industries of the businesses proposed to be separated, and changes in the regulatory or legal environment. Such changes could adversely impact the value of one or more of the Intended Business Separations to the combined company’s stockholders. Additionally, to the extent the DowDuPont Board determines to proceed with the Intended Business Separations, the consummation of such transactions is a complex, costly and time consuming process, and there can be no assurance that the intended benefits of such transactions will be achieved. An inability to realize the full extent of the anticipated benefits of the Intended Business Separations, as well as any delays encountered in the process, could have an adverse effect upon the revenues, level of expenses and operating results of the agriculture business, the specialty products business, the material science business and/or the combined company.

Risks Related to the Company’s Operations
The company's operations could be affected by various risks, many of which are beyond its control. Based on current information, the company believes that the following identifies the most significant risk factors that could affect its businesses. Past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods.

The company’s operations outside the United States are subject to risks and restrictions, which could negatively affect our results of operations, financial condition, and cash flows.
The company’s operations outside the United States are subject to risks and restrictions, including fluctuations in currency values and foreign-currency exchange rates; exchange control regulations; changes in local political or economic conditions; import and trade restrictions; import or export licensing requirements and trade policy and other potentially detrimental domestic and foreign governmental practices or policies affecting U.S. companies doing business abroad. Although DuPont has operations throughout the world, sales outside the U.S. in 2016 were principally to customers in Eurozone countries, China, Brazil, and Japan. Further, the company’s largest currency exposures are the European euro, the Chinese yuan, the Brazilian real, and the Japanese yen. Market uncertainty or an economic downturn in these geographic areas could reduce demand for the company’s products and result in decreased sales volume, which could have a negative impact on DuPont’s results of operations. In addition, changes in exchange rates may affect the company’s results from operations, financial condition and cash flows in future periods. The company actively manages currency exposures that are associated with net monetary asset positions, committed currency purchases and sales, foreign currency-denominated revenues and other assets and liabilities created in the normal course of business.

Volatility in energy and raw materials costs could have a significant impact on the company's sales and earnings.
The company's manufacturing processes consume significant amounts of energy and raw materials, the costs of which are subject to worldwide supply and demand as well as other factors beyond the control of the company. Significant variations in the cost of energy, which primarily reflect market prices for oil, natural gas, and raw materials affect the company's operating results from period to period. Legislation to address climate change by reducing greenhouse gas emissions and establishing a price on carbon could create increases in energy costs and price volatility.


12


Part I
ITEM 1A.  RISK FACTORS, continued

When possible, the company purchases raw materials through negotiated long-term contracts to minimize the impact of price fluctuations. Additionally, the company enters into over-the-counter and exchange traded derivative commodity instruments to hedge its exposure to price fluctuations on certain raw material purchases. The company takes actions to offset the effects of higher energy and raw material costs through selling price increases, productivity improvements and cost reduction programs. Success in offsetting higher raw material costs with price increases is largely influenced by competitive and economic conditions and could vary significantly depending on the market served. If the company is not able to fully offset the effects of higher energy and raw material costs, it could have a significant impact on the company's financial results.

The company's results of operations and financial condition could be seriously impacted by business disruptions and security breaches, including cybersecurity incidents.
Business and/or supply chain disruptions, plant and/or power outages and information technology system and/or network disruptions, regardless of cause including acts of sabotage, employee error or other actions, geo-political activity, weather events and natural disasters could seriously harm the company's operations as well as the operations of its customers and suppliers. Failure to effectively prevent, detect and recover from security breaches, including attacks on information technology and infrastructure by hackers; viruses; breaches due to employee error or actions; or other disruptions could result in misuse of the company's assets, business disruptions, loss of property including trade secrets and confidential business information, legal claims or proceedings, reporting errors, processing inefficiencies, negative media attention, loss of sales and interference with regulatory compliance. Like most major corporations, the company is the target of industrial espionage, including cyber-attacks, from time to time. The company has determined that these attacks have resulted, and could result in the future, in unauthorized parties gaining access to at least certain confidential business information. However, to date, the company has not experienced any material financial impact, changes in the competitive environment or business operations that it attributes to these attacks. Although management does not believe that the company has experienced any material losses to date related to security breaches, including cybersecurity incidents, there can be no assurance that it will not suffer such losses in the future. The company actively manages the risks within its control that could lead to business disruptions and security breaches. As these threats continue to evolve, particularly around cybersecurity, the company may be required to expend significant resources to enhance its control environment, processes, practices and other protective measures. Despite these efforts, such events could have a material adverse effect on the company's business, financial condition or results of operations.

Unpredictable seasonal and weather factors could impact sales and earnings from the company’s Agriculture segment.
The agriculture industry is subject to seasonal and weather factors, which can vary unpredictably from period to period. Weather factors can affect the presence of disease and pests on a regional basis and, accordingly, can positively or adversely affect the demand for crop protection products, including the mix of products used. The weather also can affect the quality, volume and cost of seeds produced for sale as well as demand and product mix. Seed yields can be higher or lower than planned, which could lead to higher inventory and related-write-offs and affect the ability to supply.

Inability to discover, develop and protect new technologies and enforce the company's intellectual property rights could adversely affect the company's financial results.
The company competes with major global companies that have strong intellectual property estates, including intellectual property rights supporting the use of biotechnology to enhance products, particularly agricultural and bio-based products. Speed in discovering, developing and protecting new technologies and bringing related products to market is a significant competitive advantage. Failure to predict and respond effectively to this competition could cause the company's existing or candidate products to become less competitive, adversely affecting sales. Competitors are increasingly challenging intellectual property positions and the outcomes can be highly uncertain. If challenges are resolved adversely, it could negatively impact the company's ability to obtain licenses on competitive terms, commercialize new products and generate sales from existing products.

Intellectual property rights, including patents, plant variety protection, trade secrets, confidential information, trademarks, tradenames and other forms of trade dress, are important to the company's business. The company endeavors to protect its intellectual property rights in jurisdictions in which its products are produced or used and in jurisdictions into which its products are imported. However, the company may be unable to obtain protection for its intellectual property in key jurisdictions. Further, changes in government policies and regulations, including changes made in reaction to pressure from non-governmental organizations, could impact the extent of intellectual property protection afforded by such jurisdictions.


13


Part I
ITEM 1A.  RISK FACTORS, continued

The company has designed and implemented internal controls to restrict access to and distribution of its intellectual property. Despite these precautions, the company's intellectual property is vulnerable to unauthorized access through employee error or actions, theft and cybersecurity incidents, and other security breaches. When unauthorized access and use or counterfeit products are discovered, the company reports such situations to governmental authorities for investigation, as appropriate, and takes measures to mitigate any potential impact. Protecting intellectual property related to biotechnology is particularly challenging because theft is difficult to detect and biotechnology can be self-replicating. Accordingly, the impact of such theft can be significant. See Part I, Item 1 for additional details on the company's intellectual property.

Market acceptance, government policies, rules, regulations and competition could affect the company's ability in certain markets to generate and sustain sales or affect profitability from products based on biotechnology.
The company is using biotechnology to create and improve products, particularly in its Agriculture and Industrial Biosciences segments. The company is also using biotechnology in the development of certain products and pre-commercial programs in Other. These products enable cost and process benefits, better product performance and functionality, and improve environmental outcomes in a broad range of products, technologies and processes such as seeds, enzymes, animal nutrition, detergents, food ingredients, ethanol production and industrial applications. The company's ability to generate and sustain sales from such products could be impacted by market acceptance, including perception of benefits and costs relative to products based on conventional technologies, as well as governmental policies, laws and regulations that affect the development, manufacture and commercialization of products, particularly the testing and planting of seeds containing biotechnology traits and the import of grains, food and food ingredients and other products derived from those seeds.

In order to maintain its right to produce or sell existing products or to commercialize new products containing biotechnology traits, particularly seed products, the company must be able to demonstrate its ability to satisfy the requirements of regulatory agencies. Sales into and use of seeds with biotechnology traits in jurisdictions where cultivation has been approved could be affected if key import markets have not approved the import of grains, food and food ingredients and other products derived from those seeds. If import of grains, food and food ingredients and other products derived from those seeds containing such biotechnology traits occurs in these markets, it could lead to disruption in trade and potential liability for the company.

In addition, the company’s regulatory compliance could be affected by the detection of low level presence of biotechnology traits in conventional seed or products produced from such seed. Furthermore, the detection of biotechnology traits not approved in the country of cultivation may affect the company’s ability to supply product and could affect exports of products produced from such seeds and even result in crop destruction or product recalls.

DuPont’s ability to obtain and maintain regulatory approval for some of its products in the Agriculture segment could limit sales or affect profitability in certain markets.
In most jurisdictions, the company must test the safety, efficacy and environmental impact of its Agricultural products to satisfy regulatory requirements and obtain the necessary approvals. In certain jurisdictions the company must periodically renew its approvals which may require it to demonstrate compliance with then-current standards. The regulatory environment is lengthy, complex and in some markets unpredictable, with requirements that can vary by product, technology, industry and country. The regulatory environment may be impacted by the activities of non-governmental organizations and special interest groups and stakeholder reaction to actual or perceived impacts of new technology, products or processes on safety, health and the environment. Obtaining and maintaining regulatory approvals requires submitting a significant amount of information and data, which may require participation from technology providers. Regulatory standards and trial procedures are continuously changing. The pace of change together with the lack of regulatory harmony could result in unintended noncompliance.

Responding to these changes and meeting existing and new requirements may involve significant costs or capital expenditures or require changes in business practice that could result in reduced profitability.  The failure to receive necessary permits or approvals could have near- and long-term effects on the company’s ability to produce and sell some current and future products.


14


Part I
ITEM 1A.  RISK FACTORS, continued

Failure to effectively manage acquisitions, divestitures, alliances and other portfolio actions could adversely impact our future results.
From time to time, the company evaluates acquisition candidates that may strategically fit its business and/or growth objectives. If the company is unable to successfully integrate and develop acquired businesses, the company could fail to achieve anticipated synergies and cost savings, including any expected increases in revenues and operating results, which could have a material adverse effect on the company’s financial results. The company continually reviews its portfolio of assets for contributions to the company’s objectives and alignment with its growth strategy. However, the company may not be successful in separating underperforming or non-strategic assets and gains or losses on the divestiture of, or lost operating income from, such assets may affect the company’s earnings. Moreover, the company might incur asset impairment charges related to acquisitions or divestitures that reduce its earnings.

The company's business, including its results of operations and reputation, could be adversely affected by process safety and product stewardship issues.
Failure to appropriately manage safety, human health, product liability and environmental risks associated with the company's products, product life cycles and production processes could adversely impact employees, communities, stakeholders, the environment, the company's reputation and its results of operations. Public perception of the risks associated with the company's products and production processes could impact product acceptance and influence the regulatory environment in which the company operates. While the company has procedures and controls to manage process safety risks, issues could be created by events outside of its control including natural disasters, severe weather events, acts of sabotage and substandard performance by third parties with which the company collaborates.

As a result of the company's current and past operations, including operations related to divested businesses, the company could incur significant environmental liabilities.
The company is subject to various laws and regulations around the world governing the environment, including the discharge of pollutants and the management and disposal of hazardous substances. As a result of its operations, including its past operations and operations of divested businesses, the company could incur substantial costs, including remediation and restoration costs. The costs of complying with complex environmental laws and regulations, as well as internal voluntary programs, are significant and will continue to be so for the foreseeable future. The ultimate costs under environmental laws and the timing of these costs are difficult to predict. The company's accruals for such costs and liabilities may not be adequate because the estimates on which the accruals are based depend on a number of factors including the nature of the matter, the complexity of the site, site geology, the nature and extent of contamination, the type of remedy, the outcome of discussions with regulatory agencies and other Potentially Responsible Parties (PRPs) at multi-party sites and the number and financial viability of other PRPs.

At December 31, 2016, the company had recognized a liability of $457 million related to the matters. Since considerable uncertainty exists, under adverse changes in circumstances, the potential liability may range up to $900 million above the amount accrued at December 31, 2016. As described in Note 3 to the Consolidated Financial Statements, DuPont and Chemours entered into a Separation Agreement in connection with the spin-off of Chemours on July 1, 2015. Pursuant to the Separation Agreement, the company is indemnified by Chemours for certain environmental matters, included in the liability of $457 million, that have an estimated liability of $250 million as of December 31, 2016 and a potential exposure that ranges up to approximately $500 million above the amount accrued. As such, the company has recorded an indemnification asset of $250 million corresponding to the company’s accrual balance related to these matters at December 31, 2016. If the company could no longer continue to recognize the related indemnification asset due to potential disputes related to recovery or solvency of Chemours, it could adversely impact DuPont’s financial position and results of operations.

Additional details on the company’s risks associated with environmental laws, regulations and environmental liabilities can be found in Part I, Item 1, Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, on page 48 of this report and Note 15 to the Consolidated Financial Statements.


15


Part I
ITEM 1A.  RISK FACTORS, continued

The company's results of operations could be adversely affected by litigation and other commitments and contingencies.
The company faces risks arising from various unasserted and asserted litigation matters, including, but not limited to, product liability, patent infringement, antitrust claims, and claims for third party property damage or personal injury stemming from alleged environmental torts. The company has noted a nationwide trend in purported class actions against chemical manufacturers generally seeking relief such as medical monitoring, property damages, off-site remediation and punitive damages arising from alleged environmental torts without claiming present personal injuries. The company also has noted a trend in public and private nuisance suits being filed on behalf of states, counties, cities and utilities alleging harm to the general public. Various factors or developments can lead to changes in current estimates of liabilities such as a final adverse judgment, significant settlement or changes in applicable law. A future adverse ruling or unfavorable development could result in future charges that could have a material adverse effect on the company. An adverse outcome in any one or more of these matters could be material to the company's financial results.

In the ordinary course of business, the company may make certain commitments, including representations, warranties and indemnities relating to current and past operations, including those related to divested businesses and issue guarantees of third party obligations. If the company were required to make payments as a result, they could exceed the amounts accrued, thereby adversely affecting the company's results of operations.

Pursuant to the Separation Agreement, Chemours indemnifies DuPont against certain litigation, environmental, workers' compensation and other liabilities that arose prior to the distribution. The term of this indemnification is indefinite and includes defense costs and expenses, as well as monetary and non-monetary settlements and judgments. If the company could no longer continue to recognize the related indemnification asset due to potential disputes related to recovery or solvency of Chemours, it could adversely impact DuPont’s financial position and results of operations.





16


Part I
ITEM 1B.  UNRESOLVED STAFF COMMENTS

None.
ITEM 2.  PROPERTIES

The company's corporate headquarters are located in Wilmington, Delaware. The company's manufacturing, processing, marketing and research and development facilities, as well as regional purchasing offices and distribution centers are located throughout the world. Additional information with respect to the company's property, plant and equipment and leases is contained in Notes 10, 15 and 20 to the Consolidated Financial Statements.
The company has investments in property, plant and equipment related to global manufacturing operations. Collectively there are approximately 290 principal sites in total. The number of sites used by their applicable segment(s) by major geographic area around the world is as follows:
 
Number of Sites
 
Agriculture
Electronics & Communications
Industrial Biosciences
Nutrition & Health
Performance Materials
Protection Solutions
Other
Total 1
Asia Pacific
23

10

2

12

16

6

2

71

EMEA2
26

3

8

28

6

3


74

Latin America
22


1

10

1

1

2

37

U.S. & Canada
60

16

11

17

13

6

1

124

 
131

29

22

67

36

16

5

306


1.
Sites that are used by multiple segments are included more than once in the figures above.
2.
Europe, Middle East, and Africa (EMEA).
The company's principal sites include facilities which, in the opinion of management, are suitable and adequate for their use and have sufficient capacity for the company's current needs and expected near-term growth. Properties are primarily owned by the company; however, certain properties are leased. No title examination of the properties has been made for the purpose of this report and certain properties are shared with other tenants under long-term leases.

17


Part I
ITEM 3.  LEGAL PROCEEDINGS

The company is subject to various litigation matters, including, but not limited to, product liability, patent infringement, antitrust claims, and claims for third party property damage or personal injury stemming from alleged environmental torts. Information regarding certain of these matters is set forth below and in Note 15 to the Consolidated Financial Statements.

Litigation
PFOA: Environmental and Litigation Proceedings
For purposes of this report, the term PFOA means collectively perfluorooctanoic acid and its salts, including the ammonium salt and does not distinguish between the two forms. Information related to this matter is included in Note 15 to the Consolidated Financial Statements under the heading PFOA.

La Porte Plant, La Porte, Texas - Crop Protection - release Incident Investigations
On November 15, 2014, there was a release of methyl mercaptan at the company’s La Porte facility. The release occurred at the site’s Crop Protection unit resulting in four employee fatalities inside the unit. DuPont continues to cooperate with governmental agencies, including the U.S. Environmental Protection Agency (EPA) and the Department of Justice (DOJ), still conducting investigations. These investigations could result in sanctions and penalties against the company.

Environmental Proceedings
The company believes it is remote that the following matters will have a material impact on its financial position, liquidity or results of operations. The descriptions are included per Regulation S-K, Item 103(5)(c) of the Securities Exchange Act of 1934.

La Porte Plant, La Porte, Texas - EPA Multimedia Inspection
The EPA conducted a multimedia inspection at the La Porte facility in January 2008. DuPont, EPA and DOJ began discussions in the fall 2011 relating to the management of certain materials in the facility's waste water treatment system, hazardous waste management, flare and air emissions. These negotiations continue.

Sabine Plant, Orange, Texas - EPA Multimedia Inspection
In June 2012, DuPont began discussions with EPA and DOJ related to a multimedia inspection that EPA conducted at the Sabine facility in March 2009 and December 2015. The discussions involve the management of materials in the facility's waste water treatment system, hazardous waste management, flare and air emissions, including leak detection and repair. These negotiations continue.

La Porte Plant, La Porte, Texas - OSHA Release Incident Citations
In May 2015, the Occupational Safety & Health Administration (OSHA) cited the company in connection with the November 2014 release for 14 violations (twelve serious, one repeat and one other-than-serious) with an aggregate associated penalty of $99,000. The company has contested the citations and the matter is before the U.S. Occupational Safety and Health Review Commission (the OSHRC). A hearing before an administrative law judge appointed by OSHRC is scheduled for the first quarter 2017.

La Porte Plant, La Porte, Texas - OSHA Process Safety Management (PSM) Audit
In 2015, OSHA conducted a PSM audit of the Crop Protection and Fluoroproducts units at the La Porte Plant. In July 2015, OSHA cited the company for three willful, one repeat and five serious PSM violations and placed the company in its Severe Violator Enforcement Program. OSHA has proposed a penalty of $273,000. The company has contested the citations and the matter is before the OSHRC. A hearing before an administrative law judge appointed by OSHRC is scheduled for the first quarter 2017.

18


Part II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market for Registrant's Common Equity and Related Stockholder Matters
The company's common stock is listed on the New York Stock Exchange, Inc. (symbol DD). The number of record holders of common stock was approximately 59,000 at January 31, 2017.

Holders of the company's common stock are entitled to receive dividends when they are declared by the Board of Directors. While it is not a guarantee of future conduct, the company has continuously paid a quarterly dividend since the fourth quarter 1904. Dividends on common stock and preferred stock are usually declared in January, April, July and October. When dividends on common stock are declared, they are usually paid mid-March, June, September and December. Preferred dividends are paid on or about the 25th of January, April, July and October. The Stock Transfer Agent and Registrar is Computershare Trust Company, N.A.

The company's quarterly high and low trading stock prices and dividends per common share for 2016 and 2015 are shown below.
    
Market Prices1
 
 
2016
High
Low
Per Share
Dividend
Declared
 
Fourth Quarter
$
75.86

$
66.19

$
0.38

 
Third Quarter
71.09

61.12

0.38

 
Second Quarter
69.40

61.62

0.38

 
First Quarter
65.70

50.71

0.38

 
 
 
 
 
 
2015
 

 

 

 
Fourth Quarter
$
75.72

$
47.43

$
0.38

2 
Third Quarter
61.93

47.11

0.38

2 
Second Quarter
75.80

63.55

0.49

 
First Quarter
80.65

70.19

0.47

 
1. 
Historical market prices do not reflect any adjustment for the impact of the spin-off of The Chemours Company (Chemours).
2. 
Per share dividend declared includes impact of the spin-off of Chemours.

Issuer Purchases of Equity Securities
In connection with the completion of the spin-off of Chemours, the Board of Directors authorized the use of the distribution proceeds received from Chemours to buy back about $4 billion shares of the company's common stock as follows: $2 billion to be purchased and retired by December 31, 2015 with the remainder to be purchased and retired by December 31, 2016. During 2015, the company purchased and retired 35 million shares through a $2 billion accelerated share repurchase agreement. The company had limited opportunity to repurchase shares in 2016, primarily due to the planned merger with The Dow Chemical Company (Dow). However, during 2016, the company purchased and retired 13.2 million shares in the open market for a cost of $916 million. As of January 1, 2017, the share authorization under this buyback program has expired.

In January 2014, the company's Board of Directors authorized a $5 billion share buyback plan. The company purchased and retired 34.7 million shares for a total cost of $2.4 billion under this program. As a result, $2.6 billion buyback authority remains under this program. There is no required completion date for purchases under this plan.
 
See Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, on page 40 of this report and Note 16 to the Consolidated Financial Statements for additional information.


19


Part II
ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES, continued

The following table summarizes information with respect to the company's purchase of its common stock during the three months ended December 31, 2016:
Month
Total Number of Shares Purchased
Average Price
Paid per Share
Total Number of
Shares Purchased as Part of Publicly Announced Program
Approximate Value
of Shares that May
Yet Be Purchased
Under the Program(1) (Dollars in millions)
November:
 
 
 
 
Open Market Purchases
5,752,436

$
69.48

5,752,436

 
December:
 
 
 
 
Open Market Purchases
1,386,149

$
72.35

1,386,149

 
Total
7,138,585

 
7,138,585

$
2,647

1.    Represents approximate value of shares that may yet be purchased under the 2014 plan.
  
Stock Performance Graph
The following graph presents the cumulative five-year total shareholder return for the company's common stock compared with the S&P 500 Stock Index and the Dow Jones Industrial Average.

stockperformancegraph.jpg
 
12/31/2011
12/31/2012
12/31/2013
12/31/2014
12/31/2015
12/31/2016
DuPont
$
100

$
102

$
152

$
178

$
173

$
196

S&P 500 Index
100

116

154

175

177

198

Dow Jones Industrial Average
100

110

143

157

158

184

The graph assumes that the values of DuPont common stock, the S&P 500 Stock Index and the Dow Jones Industrial Average were each $100 on December 31, 2011 and that all dividends were reinvested.

20


Part II
ITEM 6.  SELECTED FINANCIAL DATA



(Dollars in millions, except per share)
2016
2015
2014
2013
2012
Summary of operations1
 
 
 
 
 
Net sales
$
24,594

$
25,130

$
28,406

$
28,998

$
27,610

Employee separation / asset related charges, net
$
552

$
810

$
476

$
112

$
457

Income from continuing operations before income taxes
$
3,265

$
2,591

$
4,313

$
2,566

$
1,290

Provision for income taxes on continuing operations
$
744

$
696

$
1,168

$
360

$
122

Net income attributable to DuPont
$
2,513

$
1,953

$
3,625

$
4,848

$
2,755

Basic earnings per share of common stock from continuing operations
$
2.86

$
2.10

$
3.42

$
2.36

$
1.21

Diluted earnings per share of common stock from continuing operations
$
2.85

$
2.09

$
3.39

$
2.34

$
1.20

Financial position at year-end
 
 
 
 
 
Working capital2,3
$
8,220

$
7,071

$
8,220

$
10,055

$
6,866

Total assets
$
39,964

$
41,166

$
50,490

$
52,142

$
50,339

Borrowings and capital lease obligations
 
 
 
 
 
Short-term
$
429

$
1,165

$
1,422

$
1,721

$
1,275

Long-term
$
8,107

$
7,642

$
9,233

$
10,699

$
10,429

Total equity
$
10,196

$
10,200

$
13,378

$
16,286

$
10,299

General
 
 
 
 
 
For the year
 
 
 
 
 
Purchases of property, plant & equipment and investments in
    affiliates
$
1,038

$
1,705

$
2,062

$
1,940

$
1,890

Depreciation1
$
939

$
978

$
1,006

$
1,027

$
1,065

Research and development expense1
$
1,641

$
1,898

$
1,958

$
2,037

$
2,001

Weighted-average number of common shares outstanding (millions)
 
 
 
 
 
Basic
873

894

915

926

933

Diluted
877

900

922

933

942

Dividends per common share4
$
1.52

$
1.72

$
1.84

$
1.78

$
1.70

At year-end
 
 
 
 
 
Employees (thousands)5
46

52

54

55

61

Closing stock price
$
73.40

$
66.60

$
73.94

$
64.97

$
44.98

Common stockholders of record (thousands)
59

63

66

70

74


1. 
Information has been restated to reflect the impact of discontinued operations, as applicable. See Note 1 to the Consolidated Financial Statements for further information.
2. 
Working capital has been restated to exclude the assets and liabilities related to the Performance Chemicals segment. The assets and liabilities related to the Performance Chemicals business are presented as assets of discontinued operations and liabilities of discontinued operations, respectively, in the Consolidated Balance Sheets for all periods presented. At December 31, 2012, working capital included approximately $2 billion of net assets related to the Performance Coatings business, of which approximately $1.3 billion was previously considered to be noncurrent and was classified as held for sale as of December 31, 2012. Working capital at December 31, 2013 includes cash received from the sale of the Performance Coatings business. See Note 3 to the Consolidated Financial Statements for further information.
3. 
Working capital has been restated for all years presented to reflect the impact of the reclassification of deferred tax assets and liabilities from current to non-current in connection with the company's adoption of Accounting Standards Update (ASU) No. 2015-17. See Note 1 to the Consolidated Financial Statements for further information.
4. 
Per share dividend declared in 2015 includes impact of the spin-off of The Chemours Company (Chemours).
5. 
Number of employees excludes employees associated with the Performance Chemicals segment for all periods presented.





21


Part II

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


CAUTIONARY STATEMENTS ABOUT FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements which may be identified by their use of words like “plans,” “expects,” “will,” “anticipates,” “believes,” “intends,” “projects,” “estimates” or other words of similar meaning. All statements that address expectations or projections about the future, including statements about the company's strategy for growth, product development, regulatory approval, market position, anticipated benefits of recent acquisitions, timing of anticipated benefits from restructuring actions, outcome of contingencies, such as litigation and environmental matters, expenditures, and financial results, and timing of, as well as expected benefits, including synergies, from the planned merger with The Dow Chemical Company (Dow) and the the separation of the combined company’s agriculture business, specialty products business and material science business through a series of tax-efficient transactions (the Intended Business Separations), are forward-looking statements.

Forward-looking statements are based on certain assumptions and expectations of future events which may not be accurate or realized. Forward-looking statements also involve risks and uncertainties, many of which are beyond the company's control. While the list of factors presented here is, and the list of factors presented in the Registration Statement are, considered representative, no such list should be considered to be a complete statement of all potential risks and uncertainties. Unlisted factors may present significant additional obstacles to the realization of forward-looking statements. Consequences of material differences in results as compared with those anticipated in the forward-looking statements could include, among other things, business disruption, operational problems, financial loss, legal liability to third parties and similar risks, any of which could have a material adverse effect on Dow’s or DuPont’s consolidated financial condition, results of operations, credit rating or liquidity. Some of the important factors that could cause the company's actual results to differ materially from those projected in any such forward-looking statements are:

Risks related to the agreement entered on December 11, 2015 between DuPont and Dow to effect an all-stock merger of equals, including the completion of the proposed transaction on anticipated terms and timing, the ability to fully and timely realize the expected benefits of the proposed transaction and risks related to the Intended Business Separations contemplated to occur after the completion of the proposed transaction. Important risk factors relating to the proposed transaction and Intended Business Separations include, but are not limited to, (i) the completion of the proposed transaction on anticipated terms and timing, including obtaining regulatory approvals, anticipated tax treatment, unforeseen liabilities, future capital expenditures, revenues, expenses, earnings, synergies, economic performance, indebtedness, financial condition, losses, future prospects, business and management strategies for the management, expansion and growth of the new combined company’s operations and other conditions to the completion of the merger, (ii) the various approvals, authorizations and declarations of non-objections from certain regulatory and governmental authorities may not be obtained, on a timely basis or otherwise, including that these regulatory or governmental authorities may impose conditions on the granting of such approvals, including regarding the respective Dow and DuPont businesses to divest certain assets if necessary to obtain certain regulatory approval or otherwise limiting the ability of the combined company to integrate parts of the Dow and DuPont businesses, (iii) the ability of Dow and DuPont to integrate the businesses successfully and to achieve anticipated synergies, risks and costs and pursuit and/or implementation of the potential separations, including anticipated timing, any changes to the configuration of businesses included in the potential separation if implemented, (iv) the intended separation of the agriculture, material science and specialty products businesses of the combined company post-mergers in one or more tax efficient transactions on anticipated terms and timing, including a number of conditions which could delay, prevent or otherwise adversely affect the proposed transactions, including possible issues or delays in obtaining required regulatory approvals or clearances, disruptions in the financial markets or other potential barriers, (v) continued availability of capital and financing and rating agency actions, (vi) potential business uncertainty, including changes to existing business relationships, during the pendency of the merger that could affect DuPont’s financial performance, (vii) certain restrictions during the pendency of the merger that may impact DuPont’s ability to pursue certain business opportunities or strategic transactions. These risks, as well as other risks associated with the proposed merger, are more fully discussed in the joint proxy statement/prospectus included in the Registration Statement.
Volatility in energy and raw material prices;
Failure to develop and market new products and optimally manage product life cycles;
Outcome of significant litigation and environmental matters, including those related to divested businesses, including realization of associated indemnification assets, if any;
Failure to appropriately manage process safety and product stewardship issues;
Ability to obtain and maintain regulatory approval for its products especially in the Agriculture segment;
Failure to realize all of the expected benefits from cost and productivity initiatives to the extent and as anticipated;
Effect of changes in tax, environmental and other laws and regulations or political conditions in the United States of America (U.S.) and other countries in which the company operates;

22


Part II

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Conditions in the global economy and global capital markets, including economic factors such as inflation, deflation, fluctuation in currency rates, interest rates and commodity prices;
Failure to appropriately respond to market acceptance, government rules, regulations and policies affecting products based on biotechnology;
Impact of business disruptions, including supply disruptions, and security threats, regardless of cause, including acts of sabotage, cyber-attacks, terrorism or war, natural disasters and weather events and patterns which could affect demand as well as availability of product, particularly in the Agriculture segment;
Ability to discover, develop and protect new technologies and enforce the company's intellectual property rights; and
Successful integration of acquired businesses and separation of underperforming or non-strategic assets or businesses.

For some of the important factors that could cause the company's actual results to differ materially from those projected in any such forward-looking statements, see the Risk Factors discussion set forth under Part I, Item 1A beginning on page 9.

Overview

DuPont Dow Merger of Equals    On December 11, 2015, DuPont and Dow announced entry into an Agreement and Plan of Merger (the Merger Agreement), under which the companies will combine in an all-stock merger of equals (the Merger Transaction), subject to satisfaction of customary closing conditions, including receipt of regulatory approval. The combined company will be named DowDuPont Inc. (DowDuPont). DuPont's special meeting of stockholders was held on July 20, 2016, which resulted in a vote for adoption of the Merger Agreement and approval of related matters. Closing of the Merger Transaction is expected to occur in the first half of 2017, pending satisfaction of customary closing conditions, including receipt of regulatory approval.

Following the consummation of the merger, Dow and DuPont intend to pursue, subject to the receipt of approval by the board of directors of DowDuPont, the separation of the combined company’s agriculture business, specialty products business and material science business through a series of tax-efficient transactions (the Intended Business Separations). Dow and DuPont currently anticipate that the Intended Business Separations will occur about 18 months after the merger is consummated.
 
During the years ended December 31, 2016 and 2015, the company incurred $386 million and $10 million, respectively, of costs in connection with the planned merger with Dow and the Intended Business Separations, including costs relating to integration and separation planning. These costs were recorded in selling, general and administrative expenses in the company's Consolidated Income Statements and primarily include financial advisory, legal, accounting, consulting and other advisory fees and expenses.

See the discussion entitled DuPont Dow Merger of Equals under Part 1, Item 1 Business of this report, Part 1, Item 1A, Risk Factors, and Note 2 to the Consolidated Financial Statements for further details and a discussion of some of the risks related to the transaction.

Purpose DuPont’s businesses serve markets where the increasing demand for more and healthier food, renewably sourced materials and fuels, and advanced industrial materials is creating substantial growth opportunities. The company’s unique combination of sciences, proven research and development (R&D) engine, broad global reach, and deep market penetration are distinctive competitive advantages that position the company to continue capitalizing on this enormous potential.

DuPont has dramatically refined its portfolio to focus investment in areas where it sees significant opportunity and secular growth; enhanced its innovation platform to deliver substantial revenues from new products; increased focus on efficiency, cost discipline, and accountability; and expanded markets geographically.

The company is committed to maintaining a strong balance sheet and to return excess cash to shareholders unless there is a compelling opportunity to invest for growth.

Results    DuPont 2016 sales were $24.6 billion, 2 percent below last year, reflecting a 1 percent decline from the negative impact of weaker currencies and a 1 percent decline due to lower prices and product mix. Volume growth in Performance Materials, Nutrition & Health, and Industrial Biosciences was offset by declines in the other segments. Income from continuing operations before taxes of $3.3 billion was up 26 percent versus $2.6 billion in prior year, on cost savings and lower pension and other post employment benefits (OPEB) costs. Pension and OPEB costs were down 63 percent year over year, primarily due to curtailment gains recognized as a result of changes made to the U.S. Pension and OPEB benefits in 2016.

23


Part II

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued

Analysis of Operations
2016 Global Cost Savings and Restructuring Plan     On December 11, 2015, DuPont announced a 2016 global cost savings and restructuring plan (the 2016 global cost savings and restructuring plan) designed to reduce costs in 2016 by $730 million compared with 2015, which represents a reduction of operating costs on a run-rate basis of about $1.0 billion by the end of 2016. As part of the plan, the company committed to take structural actions across all businesses and staff functions globally to operate more efficiently by further consolidating businesses and aligning staff functions more closely with them.  In connection with the restructuring actions, the company recorded a pre-tax charge to earnings of $798 million in the fourth quarter 2015, comprised of $656 million of severance and related benefit costs, $109 million of asset related charges, and $33 million of contract termination costs. During the year ended December 31, 2016, in connection with the restructuring actions, the company recorded a net pre-tax benefit to earnings of $85 million, comprised of a net reduction of $154 million in severance and related benefit costs, offset by $53 million of asset related charges, and $16 million of contract termination costs. This was primarily due to a reduction in severance and related benefit costs partially offset by the identification of additional projects in certain segments. The reduction in severance and related benefit costs was driven by elimination of positions at a lower cost than expected as a result of redeployments and attrition as well as lower than estimated individual severance costs.

The 2016 global cost savings and restructuring plan delivered the target cost reductions versus prior year. The restructuring actions associated with this charge affected approximately 10 percent of DuPont’s workforce and are now substantially complete.
 
Redesign Initiative and 2014 Restructuring Plan In June 2014, DuPont announced its global, multi-year initiative to redesign its global organization and operating model to reduce costs and improve productivity and agility across all businesses and functions.  DuPont commenced a restructuring plan to realign and rebalance staff function support, enhance operational efficiency, and to reduce residual costs associated with the separation of its Performance Chemicals segment. As a result, during the year ended December 31, 2014, a pre-tax charge of $541 million was recorded. Cost reductions from the 2014 operational redesign were essentially completed during 2015 and for full year 2015, the company delivered incremental cost savings of approximately $440 million year over year. Additional details related to this plan can be found in Note 4 to the Consolidated Financial Statements.

Separation of Performance Chemicals In October 2013, DuPont announced its intention to separate its Performance Chemicals segment through a U.S. tax-free spin-off to shareholders, subject to customary closing conditions.  In July 2015, DuPont completed the separation of its Performance Chemicals segment through the spin-off of all of the issued and outstanding stock of The Chemours Company (Chemours).


24


Part II

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued

(Dollars in millions)
2016
2015
2014
NET SALES
$
24,594

$
25,130

$
28,406


2016 versus 2015   The table below shows a regional breakdown of 2016 consolidated net sales based on location of customers and percentage variances from prior year:
 
Percent Change Due to:
(Dollars in billions)
2016
Net Sales
Percent
Change vs.
2015
Local
Price and Product Mix
Currency
Volume
Portfolio and Other
Worldwide
$
24.6

(2
)
(1
)
(1
)


U.S. & Canada
10.4

(3
)
(2
)


(1
)
EMEA1
5.7

(5
)
1

(3
)
(2
)
(1
)
Asia Pacific
5.8

3

(1
)
(1
)
4

1

Latin America
2.7

(3
)
2

(2
)
(2
)
(1
)
1. 
Europe, Middle East, and Africa (EMEA).

Net sales of $24.6 billion were 2 percent below prior year, reflecting a 1 percent reduction due to currency and a 1 percent decrease due to lower local prices. Negative currency impact was primarily due to the weaker European euro, Mexican peso, and Chinese yuan, partly offset by the stronger Japanese yen and Brazilian real. The 1 percent negative impact from lower local prices primarily reflects lower prices in Performance Materials, largely polymers, lower Electronics & Communications prices and flat prices for Agriculture where higher prices in EMEA and Latin America were offset by declines in North America. Worldwide volume was flat as growth in Performance Materials, Nutrition & Health, and Industrial Biosciences was offset by lower volume in Electronics & Communications, Protection Solutions, and Agriculture, the latter due to lower sales of crop protection products. Net sales in developing markets, were $8.4 billion, up 2 percent, with 4 percent higher volume, principally due to strong growth in Agriculture, Performance Materials, Electronics & Communications, and Nutrition & Health, in developing Asia Pacific. Sales growth in developing markets was partly offset by a negative currency impact. Representing 34 percent of total company sales, developing markets include China, India, and countries in Southeast Asia, Latin America, Eastern and Central Europe, Middle East, and Africa.


25


Part II

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued

2015 versus 2014   The table below shows a regional breakdown of 2015 consolidated net sales based on location of customers and percentage variances from prior year:
 
Percent Change Due to:
(Dollars in billions)
2015
Net Sales
Percent
Change vs.
2014
Local
Price and Product Mix
Currency
Volume
Portfolio and Other
Worldwide
$
25.1

(12
)

(7
)
(3
)
(2
)
U.S. & Canada
10.8

(6
)
(2
)
(1
)
(2
)
(1
)
EMEA1
6.0

(17
)
2

(15
)
(2
)
(2
)
Asia Pacific
5.6

(9
)
(2
)
(3
)
(2
)
(2
)
Latin America
2.7

(23
)
2

(15
)
(9
)
(1
)
1. 
Europe, Middle East, and Africa (EMEA).

Net sales of $25.1 billion were down 12 percent versus prior year reflecting a 7 percent negative impact from weaker currencies, particularly the Brazilian real and the European euro, 3 percent lower volume and a 2 percent negative impact from the absence of sales from divested businesses. Lower volume principally reflects a 6 percent decline in Agriculture that was primarily driven by lower seed volume and reduced demand for insect control products in Latin America, a 7 percent decline in volumes for Electronics & Communications, primarily driven by competitive pressures impacting sales of Solamet® paste, and a 2 percent decline in volumes for Industrial Biosciences due to lower demand for biomaterials and clean technologies offerings. These declines more than offset volume growth for Performance Materials, Nutrition & Health, and Protection Solutions. Portfolio and other reflects the impact of the prior year sales of Glass Laminating Solutions/Vinyls within the Performance Materials segment and Sontara® within the Protection Solutions segment. The impact from local prices and product mix was about even with prior year as 3 percent higher Agriculture prices were offset primarily by lower prices in Performance Materials and Electronics & Communications. Net sales in developing markets were $8.2 billion, 33 percent of total company net sales versus 34 percent in 2014, representing a slight decline principally due to lower Agriculture volume in Latin America. Developing markets include China, India, countries located in Latin America, Eastern and Central Europe, Middle East, Africa and South East Asia.
(Dollars in millions)
2016
2015
2014
COST OF GOODS SOLD
$
14,469

$
15,112

$
17,023

As a percent of net sales
59
%
60
%
60
%
2016 versus 2015    Cost of goods sold (COGS) decreased $0.6 billion, or 4 percent, principally due to lower raw material costs, lower pension and OPEB costs, and the strengthening of the U.S. dollar versus global currencies. COGS as a percentage of sales was 59 percent versus 60 percent last year, principally due to lower raw material costs and lower pension and OPEB costs.

2015 versus 2014    COGS decreased $1.9 billion, or 11 percent, principally reflecting declines from currency due to the strengthening of the U.S. dollar versus global currencies, productivity improvements, impacts of portfolio changes, lower volume and lower raw material costs. COGS as a percent of sales was unchanged from prior year at 60 percent as the benefit of productivity improvements offset the negative impact of currency which decreased sales by 7 percent and COGS by 4 percent.
(Dollars in millions)
2016
2015
2014
OTHER OPERATING CHARGES
$
686

$
459

$
645

As a percent of net sales
3
%
2
%
2
%

2016 versus 2015  Other operating charges increased $227 million, or 49 percent, reflecting a $152 million decrease in Imprelis® herbicide insurance recoveries, and a $23 million reduction in the estimated liability related to Imprelis® herbicide claims versus a $130 million accrual reduction in the prior year.

2015 versus 2014   Other operating charges decreased $186 million, or 29 percent, principally reflecting $130 million reduction in the estimated liability related to Imprelis® herbicide claims, cost savings from the company's operational redesign initiative partially offset by lower insurance recoveries year over year related to Imprelis® herbicide claims.

26


Part II

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued

(Dollars in millions)
2016
2015
2014
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
$
4,319

$
4,615

$
4,891

As a percent of net sales
18
%
18
%
17
%

2016 versus 2015    The $296 million decrease was primarily due to lower costs related to the 2016 global cost savings and restructuring plan, lower selling expense, and a decrease in pension and OPEB costs, partially offset by $386 million of transaction costs associated with the planned merger with Dow.

2015 versus 2014    The $276 million decrease was primarily due to the strengthening of the U.S. dollar versus global currencies, cost savings from the company's 2014 operational redesign initiative, and lower selling and commission expense, mainly within the Agriculture segment, partially offset by an increase in pension and OPEB costs. Selling, general and administrative expenses as a percentage of net sales increased by 1 percent, primarily due to lower sales and higher pension and OPEB costs.
(Dollars in millions)
2016
2015
2014
RESEARCH AND DEVELOPMENT EXPENSE
$
1,641

$
1,898

$
1,958

As a percent of net sales
7
%
8
%
7
%

2016 versus 2015    The $257 million decrease was primarily due to lower costs related to the 2016 global cost savings and restructuring plan, a decrease in pension and OPEB costs and the strengthening of the U.S. dollar versus global currencies. Research and development expense as a percent of sales decreased 1 percent, primarily due to cost savings from the company’s 2016 global cost savings and restructuring plan and a decrease in pension and OPEB costs.

2015 versus 2014    The $60 million decrease was primarily due to the strengthening of the U.S. dollar versus global currencies, cost savings from the company's operational redesign initiative, partially offset by higher pension and OPEB costs. Research and development expense as a percent of sales increased due to lower sales.
(Dollars in millions)
2016
2015
2014
OTHER INCOME, NET
$
708

$
697

$
1,277


2016 versus 2015 The $11 million increase was primarily due to gains on sales of businesses and other assets, including a $369 million gain on the sale of DuPont (Shenzhen) Manufacturing Limited, partially offset by an increase in pre-tax exchange losses and the absence of a $145 million gain associated with the company's settlement of a legal claim in the prior year related to the Protection Solutions segment. Pre-tax exchange losses increased $136 million compared to prior year. See Notes 5 and 19 to the Consolidated Financial Statements for further discussion of the company's policy of hedging the foreign currency-denominated monetary assets and liabilities.

2015 versus 2014 The $580 million decrease was primarily due to the absence of prior year gains on sales of businesses and other assets, including a $391 million gain on the sale of GLS/Vinyls, within the Performance Materials segment, and a $240 million gain on the sale of copper fungicides and land management businesses, both within the Agriculture segment, partially offset by gains on sales of businesses and assets in 2015, primarily in the Agriculture and Performance Materials segments. In addition, pre-tax exchange gains decreased $166 million compared to prior year driven by lower gains on foreign currency exchange contracts. See Notes 5 and 19 to the Consolidated Financial Statements for further discussion of the company's policy of hedging the foreign currency-denominated monetary assets and liabilities. These decreases were partially offset by $145 million gain associated with the company's settlement of a legal claim related to the Protection Solutions segment and $85 million increase in equity in earnings of affiliates, primarily due to the absence of $65 million for charges associated with the restructuring actions of a joint venture within the Performance Materials segment recorded in 2014.

Additional information related to the company's other income, net is included in Note 5 to the Consolidated Financial Statements.

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Part II

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued

(Dollars in millions)
2016
2015
2014
INTEREST EXPENSE
$
370

$
342

$
377


The $28 million increase in 2016 was primarily due to lower capitalized interest related to construction projects partially offset by lower interest on borrowings.

The $35 million decrease in 2015 was primarily due to lower average borrowings partially offset by slightly higher average interest rates compared to prior year.
(Dollars in millions)
2016
2015
2014
EMPLOYEE SEPARATION/ASSET RELATED CHARGES, NET
$
552

$
810

$
476


The $552 million in charges recorded during 2016 in employee separation / asset related charges, net consist of $593 million of asset impairment charges discussed below, and a $68 million charge related to the decision to not re-start the Agriculture segment’s insecticide manufacturing facility at the La Porte site located in La Porte, Texas. These charges were partially offset by a net $88 million benefit related to the 2016 restructuring plan, primarily due to a reduction in severance and related benefit costs driven by the elimination of positions at a lower cost than expected, and a $21 million benefit related to the 2014 restructuring plan for adjustments to the previously recognized severance costs.

The $810 million in charges recorded during 2015 in employee separation / asset related charges, net consist of a $793 million charge related to the 2016 restructuring plan discussed below, and a $38 million impairment charge discussed below, partly offset by a $21 million net benefit related to the 2014 restructuring plan. The $21 million net benefit was recorded to adjust the estimated costs associated with the 2014 restructuring program due to lower than estimated individual severance costs and workforce reductions achieved through non-severance programs, offset by the identification of additional projects in certain segments.

On December 11, 2015, DuPont announced a 2016 global cost savings and restructuring plan designed to reduce $730 million in costs compared to 2015. As part of the plan, the company committed to take structural actions across all businesses and staff functions globally to operate more efficiently by further consolidating businesses and aligning staff functions more closely with them. As a result, during the year ended December 31, 2015, a pre-tax charge of $798 million was recorded, consisting of $793 million of employee separation / asset related charges, net and $5 million in other income, net. The charges consisted of $656 million in severance and related benefit costs, $109 million in asset related charges, and $33 million in contract termination charges.
The $476 million in charges recorded during 2014 in employee separation / asset related charges, net related to the 2014 global, multi-year initiative to redesign its global organization and operating model to improve productivity and agility across all businesses and functions.  DuPont commenced a restructuring plan to realign and rebalance staff function support, enhance operational efficiency, and to reduce residual costs associated with the separation of its Performance Chemicals segment. As a result, during the year ended December 31, 2014, a pre-tax charge of $541 million was recorded, consisting of $476 million in employee separation / asset related charges, net and $65 million in other income, net. The charges consisted of $301 million severance and related benefit costs, $17 million of other non-personnel costs, and $223 million of asset related costs, including $65 million of costs associated with the restructuring actions of a joint venture within the Performance Materials segment.

Asset Impairments
During 2016, the company recorded an asset impairment charge of $435 million related to its uncompleted enterprise resource planning (ERP) system.  The company intends to complete the ERP system project, however, given the uncertainties related to timing as well as potential developments and changes to technologies in the market place at the time of restart, use of the ERP system can no longer be considered probable. See Note 4 to the Consolidated Financial Statements for additional details related to this charge.

During 2016, the company recorded a $158 million impairment charge related to indefinite-lived intangible trade names within the Industrial Biosciences segment as a result of the realignment of brand marketing strategies and a determination to phase out the use of certain acquired trade names.

During 2015, the company recorded an impairment charge of $38 million in the Other segment, the majority relating to an impairment of a cost basis investment.

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ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued

Additional details related to the restructuring programs and asset impairments discussed above can be found in Note 4 to the Consolidated Financial Statements.

Below is a summary of the net impact related to items recorded in employee separation / asset related charges, net:
 (Dollars in millions)
2016 (Charges) and Credits
2015 (Charges) and Credits
2014 (Charges) and Credits
Agriculture
$
(85
)
$
(164
)
$
(134
)
Electronics & Communications
4

(78
)
(84
)
Industrial Biosciences
(152
)
(61
)
(20
)
Nutrition & Health
9

(50
)
(15
)
Performance Materials
3

(58
)
(34
)
Protection Solutions
14

(40
)
(45
)
Other
(11
)
(40
)
(10
)
Corporate expenses
(334
)
(319
)
(134
)
Total Charges
$
(552
)
$
(810
)
$
(476
)

(Dollars in millions)
2016
2015
2014
PROVISION FOR INCOME TAXES ON CONTINUING OPERATIONS
$
744

$
696

$
1,168

Effective income tax rate
22.8
%
26.9
%
27.1
%

In 2016, the company recorded a tax provision on continuing operations of $744 million, reflecting a marginal increase from 2015. The decrease in the 2016 effective tax rate compared to 2015 was largely due to the impact of reduced net exchange losses recognized on the re-measurement of net monetary asset positions which were not tax deductible in the relevant local jurisdictions.

In 2015, the company recorded a tax provision on continuing operations of $696 million, reflecting a $472 million decrease from 2014. The decrease was largely due to the impact associated with the company’s policy of hedging the foreign currency-denominated monetary assets and liabilities of its operations, the absence of 2014 gains on sales of businesses and other assets in the Performance Materials and Agriculture segments, as well as increased tax benefits on employee separation / asset related charges.
See Note 6 to the Consolidated Financial Statements for additional details related to the provision for income taxes on continuing operations, as well as items that significantly impact the company's effective income tax rate.
(Dollars in millions)
2016
2015
2014
INCOME FROM CONTINUING OPERATIONS AFTER INCOME TAXES
$
2,521

$
1,895

$
3,145


Income from continuing operations after income taxes for 2016 was $2.5 billion compared to $1.9 billion in 2015 and $3.1 billion in 2014. The changes between periods were due to the reasons noted above.


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ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued

Corporate Outlook
Globally, GDP and industrial production are expected to grow 2.7 and 2.4 percent, respectively, in 2017. The company expects this growth will be challenged by the current difficult global economic conditions in agriculture, economic uncertainty in the U.S., political and economic uncertainty in Europe and slowing conditions in China from the continued shift of industrial production to services and consumer sectors. The company expects headwinds from currency due to the continued strengthening of the U.S. dollar against most currencies.

In the agriculture sector, commodity prices are under pressure from record yields and crop productions. As farmers look to relative economics between crop alternatives, the company expects them to favor soybeans over corn in North America which is generally less favorable to the company’s overall income from continuing operations. In crop protection, the company expects the industry decline to ease in 2017, but continues to be negatively impacted by high inventory levels, a stronger U.S. dollar, and the continued penetration of insect-resistant soybeans.

In the auto sector, according to IHS, auto growth is expected to slow in 2017, with 1 percent growth year over year.

As the company prepares for the close of the planned merger with Dow, the company expects income from continuing operations in 2017 to be impacted by transaction related costs associated with the merger and the Intended Business Separations, including costs related to integration and separation planning.

Recent Accounting Pronouncements
See Note 1 to the Consolidated Financial Statements for a description of recent accounting pronouncements.


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Part II

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued

Segment Reviews
Segment operating earnings is defined as income (loss) from continuing operations before income taxes excluding significant pre-tax benefits (charges), non-operating pension and OPEB costs, exchange gains (losses), corporate expenses and interest. Non-operating pension and OPEB costs includes all of the components of net periodic benefit cost from continuing operations with the exception of the service cost component. See Note 21 to the Consolidated Financial Statements for details related to significant pre-tax benefits (charges) excluded from segment operating earnings. All references to prices are based on local price unless otherwise specified.

A reconciliation of segment operating earnings to income from continuing operations before income taxes for 2016, 2015 and 2014 is included in Note 21 to the Consolidated Financial Statements.

DuPont Sustainable Solutions, previously within the company's former Safety & Protection segment (now Protection Solutions), was comprised of two business units: clean technologies and consulting solutions. Effective January 1, 2016, the clean technologies business unit became part of the Industrial Biosciences segment with the focus on working with customers to improve the performance, productivity and sustainability of their products and processes. The company is exploring a range of options to maximize the growth of the consulting solutions business unit which effective January 1, 2016 is reported within Other. Reclassifications of prior year data have been made to conform to current year classifications.



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Part II

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued

AGRICULTURE
(Dollars in millions)
2016
2015
2014
Net sales
$
9,516

$
9,798

$
11,296

Operating earnings
$
1,758

$
1,646

$
2,352

Operating earnings margin
18
%
17
%
21
%
 
2016
2015
Change in net sales from prior period due to:
 
 
Local Price and Product Mix
 %
3
 %
Currency
(2
)%
(9
)%
Volume
(1
)%
(6
)%
Portfolio and Other
 %
(1
)%
Total change
(3
)%
(13
)%

2016 versus 2015    Full year 2016 segment net sales of $9.5 billion decreased 3 percent, primarily due to the negative impact of currency and lower crop protection volumes. Lower crop protection volumes are primarily due to lower insecticide volumes from low pest pressure and high inventories, and lower fungicide volumes. Seed volumes were flat year over year as increased corn seed volumes in Latin America and North America due to higher acreage and new product launches, were offset by the shift in timing of seed sales primarily related to the southern U.S. route-to-market change and lower soybean volumes. The shift in timing moved approximately $200 million of sales from fourth quarter 2016 to first quarter 2017.

2016 operating earnings and operating earnings margin increased as cost savings and lower product costs were partially offset by timing of seed deliveries, primarily related to the southern U.S. route-to-market change and the negative impact of currency.

2015 versus 2014    Full year 2015 segment net sales of $9.8 billion decreased $1.5 billion, or 13 percent, primarily due to the negative impact of currency and lower seed and crop protection volumes, primarily in Brazil and North America, which were partly offset by higher local corn seed prices. In Brazil, lower corn seed volume reflects the impact of a reduction in summer planted hectares of corn and fall armyworm resistance impacting performance of certain corn hybrids. In North America, lower soybean volume reflects between 1 and 2 points of share loss and lower soybean planted area; lower corn planted area was partially offset by higher local corn seed prices. Lower crop protection volume is primarily due to low expected insect pressure, the adoption of insect protected soybean varieties, higher inventories, and a challenging macro environment. Insect control volumes were also impacted by the shutdown of the La Porte manufacturing facility in Texas.

2015 operating earnings and operating earnings margin decreased primarily due to the negative impact of currency of $538 million, lower sales, and an approximately $120 million negative impact of the shutdown of the La Porte manufacturing facility and the absence of prior year impacts from performance-based compensation adjustments, partially offset by cost reductions and continued productivity improvements.





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ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued

ELECTRONICS & COMMUNICATIONS
(Dollars in millions)
2016
2015
2014
Net sales
$
1,960

$
2,070

$
2,381

Operating earnings
$
358

$
359

$
336

Operating earnings margin
18
%
17
%
14
%
 
2016
2015
Change in net sales from prior period due to:
 
 
Local Price and Product Mix
(2
)%
(4
)%
Currency
 %
(2
)%
Volume
(3
)%
(7
)%
Portfolio and Other
 %
 %
Total change
(5
)%
(13
)%

2016 versus 2015 Full year 2016 segment net sales of $2.0 billion decreased 5 percent, due largely to lower demand for products for the consumer electronics market. In photovoltaics materials, share gains in Solamet® paste and higher pricing from the pass-through of higher average metal prices were offset by volume declines in Tedlar® film and price pressure in both Solamet® and Tedlar®.

2016 operating earnings were flat with prior year as cost savings were offset by lower sales and a $16 million litigation expense. Operating earnings margin increased primarily due to cost savings.

2015 versus 2014     Full year 2015 segment net sales of $2.1 billion decreased $0.3 billion, or 13 percent, primarily due to competitive pressures impacting Solamet® paste and lower pricing from the pass-through of lower metals prices and the negative impact of currency, partially offset by volume growth in Tedlar® film for photovoltaics and products for the consumer electronics market.

2015 operating earnings and operating earnings margin increased as cost reductions and continued productivity improvements more than offset lower sales.





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Part II

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued

INDUSTRIAL BIOSCIENCES
(Dollars in millions)
2016
2015
2014
Net sales
$
1,500

$
1,478

$
1,624

Operating earnings
$
270

$
243

$
269

Operating earnings margin
18
%
16
%
17
%
 
2016
2015
Change in net sales from prior period due to:
 
 
Local Price and Product Mix
 %
(3
)%
Currency
(2
)%
(4
)%
Volume
2
 %
(2
)%
Portfolio and Other
1
 %
 %
Total change
1
 %
(9
)%

2016 versus 2015 Full year 2016 segment net sales of $1.5 billion increased 1 percent, as volume growth in biomaterials and bioactives and portfolio changes were partially offset by weak demand in clean technologies and a negative impact from currency. Volume growth in biomaterials and bioactives was primarily driven by increased demand in apparel markets and for enzymes, principally for food products and home and personal care,

2016 operating earnings and operating earnings margin increased as cost savings and higher sales were partially offset by the negative impact of currency.

2015 versus 2014 Full year 2015 segment net sales of $1.5 billion decreased 9 percent, primarily due to the negative impact of currency, lower prices and demand for biomaterials and clean technologies offerings, partially offset by volume growth in enzymes, principally for home and personal care, food markets and ethanol production.

2015 operating earnings and operating earnings margin decreased primarily due to lower sales, partially offset by cost reductions and continued productivity improvements.


















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Part II

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued

NUTRITION & HEALTH
(Dollars in millions)
2016
2015
2014
Net sales
$
3,268

$
3,256

$
3,529

Operating earnings
$
504

$
373

$
369

Operating earnings margin
15
%
11
%
10
%
 
2016
2015
Change in net sales from prior period due to:
 
 
Local Price and Product Mix
 %
 %
Currency
(2
)%
(9
)%
Volume
2
 %
2
 %
Portfolio and Other
 %
(1
)%
Total change
 %
(8
)%

2016 versus 2015     Full year 2016 segment net sales of $3.3 billion were flat with prior year as broad-based volume growth led by probiotics, ingredient systems, and specialty proteins was offset by the negative impact of currency.

2016 operating earnings and operating earnings margin increased on cost savings, volume growth and a $27 million gain on the sale of an asset.

2015 versus 2014     Full year 2015 segment net sales of $3.3 billion decreased 8 percent, primarily due to the negative impact of currency. Volume growth in probiotics, ingredient systems, texturants and cultures was partially offset by lower volumes in specialty proteins due to competitive challenges.

2015 operating earnings and operating earnings margin increased as cost reductions and continued productivity improvements and volume gains were mostly offset by the negative impact from currency of $53 million and the absence of the prior year $18 million gain from the termination of a distribution agreement.


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ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued

PERFORMANCE MATERIALS
(Dollars in millions)
2016
2015
2014
Net sales
$
5,249

$
5,305

$
6,059

Operating earnings
$
1,297

$
1,216

$
1,267

Operating earnings margin
25
%
23
%
21
%
 
2016
2015
Change in net sales from prior period due to:
 
 
Local Price and Product Mix
(3
)%
(4
)%
Currency
(1
)%
(6
)%
Volume
3
 %
1
 %
Portfolio and Other
 %
(3
)%
Total change
(1
)%
(12
)%

2016 versus 2015  Full year 2016 segment net sales of $5.3 billion decreased 1 percent, as lower local price, driven by pricing pressure for raw materials pass-through, and a negative impact from currency were partially offset by increased volume for polymers in global automotive markets, primarily in Asia Pacific.

2016 operating earnings and operating earnings margin increased as cost saving and increased volumes were partially offset by a $63 million negative impact from currency. The net benefit of lower product costs was offset by the absence of $49 million of benefits from the prior year discussed below.

2015 versus 2014 Full year 2015 segment net sales of $5.3 billion decreased $0.8 billion, or 12 percent, primarily due to the negative impact of currency, lower ethylene pricing and the portfolio impact of the sale of Glass Laminating Solutions/Vinyls (GLS/Vinyls) in June 2014 (see Note 3 to the Consolidated Financial Statements for additional information). Partially offsetting the declines are increased ethylene volumes due to the prior year scheduled outage at the ethylene unit in Orange, Texas and increased demand for polymers in automotive markets, primarily in the U.S. and Europe in the second half of 2015.

2015 operating earnings decreased as cost reductions and continued productivity improvements were more than offset by the negative impact of currency of $132 million and lower selling prices. 2015 operating earnings includes $49 million of benefits, comprised of a net benefit from a joint venture, the sale of a business and the realization of tax benefits associated with a manufacturing site. Operating earnings margin increased due primarily to cost reductions and continued productivity improvements.



36


Part II

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued

PROTECTION SOLUTIONS
(Dollars in millions)
2016
2015
2014
Net sales
$
2,954

$
3,039

$
3,304

Operating earnings
$
668

$
641

$
672

Operating earnings margin
23
%
21
%
20
%
 
2016
2015
Change in net sales from prior period due to:
 
 
Local Price and Product Mix
(1
)%
(1
)%
Currency
 %
(4
)%
Volume
(2
)%
1
 %
Portfolio and Other
 %
(4
)%
Total change
(3
)%
(8
)%

2016 versus 2015 Full year 2016 segment net sales of $3.0 billion decreased 3 percent, due to lower volume and unfavorable mix. Volume declines in Nomex® thermal-resistant fiber, Kevlar® high-strength material, and Tyvek® protective material, were driven by weakness in the oil and gas industry, military, and industrial market demand. Volume declines were partially offset by volume growth in solid surfaces.

2016 operating earnings and operating earnings margin increased as cost savings were partially offset by lower sales.

2015 versus 2014 Full year 2015 segment net sales of $3.0 billion decreased $0.3 billion, or 8 percent, primarily due to the negative impact of currency and the portfolio impact of the Sontara® divestiture. Increased demand for Tyvek® protective material, including medical packaging was partially offset by decreased demand for Nomex® thermal resistant fiber and Kevlar® high strength materials driven by a weakened oil and gas industry and military spending delays.

2015 operating earnings decreased $31 million, or 5 percent, as cost reductions and continued productivity improvements were more than offset by the negative impact of currency of $53 million and lower sales. 2015 operating earnings margin increased from prior year due to cost reductions and continued productivity improvements.
 


















37


Part II

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued

Liquidity & Capital Resources
 
December 31,
(Dollars in millions)
2016
2015
Cash, cash equivalents and marketable securities
$
5,967

$
6,206

Total debt
8,536

8,807


Pursuant to its cash discipline policy, the company seeks first to maintain a strong balance sheet and second, to return excess cash to shareholders unless the opportunity to invest for growth is compelling. The company continually reviews its sources of liquidity and debt portfolio and occasionally may make adjustments to one or both to ensure adequate liquidity and an optimum debt maturity schedule.

The company's credit ratings impact its access to the debt capital markets and cost of capital. The company remains committed to a strong financial position and strong investment-grade rating. The company's long-term and short-term credit ratings are as follows:
 
Long-term
Short-term
Outlook
Standard & Poor's
A-
A-2
Credit Watch Negative
Moody’s Investors Service
A3
P-2
Negative
Fitch Ratings
A
F1
Rating Watch Negative

The company believes its ability to generate cash from operations and access to capital markets will be adequate to meet anticipated cash requirements to fund working capital, capital spending, dividend payments, share repurchases, debt maturities and other cash needs and that its current strong financial position, liquidity and credit ratings continue to provide access as needed to the capital markets. The company's liquidity needs can be met through a variety of sources, including cash provided by operating activities, cash and cash equivalents, marketable securities, commercial paper, syndicated credit lines, bilateral credit lines, long-term debt markets, bank financing, committed receivable repurchase facilities and asset sales.

The company has access to approximately $7.9 billion in unused credit lines with several major financial institutions including unused commitments of $4 billion under the Term Loan Facility described below and a $3 billion revolving credit facility to support its commercial paper program. These unused credit lines provide additional support to meet short-term liquidity needs and general corporate purposes including letters of credit.

In March 2016, the company entered into a credit agreement that provides for a three-year, senior unsecured term loan facility in the aggregate principal amount of $4.5 billion (the Term Loan Facility). DuPont may make up to seven term loan borrowings within one year of the closing date and amounts repaid or prepaid are not available for subsequent borrowings. The proceeds from the borrowings under the Term Loan Facility will be used for the company's general corporate purposes including debt repayment, working capital and share repurchases. The Term Loan Facility matures in March 2019 at which time all outstanding borrowings, including accrued but unpaid interest, become immediately due and payable. As of December 31, 2016, the company had borrowed $0.5 billion and had unused commitments of $4 billion under the Term Loan Facility.

In addition, in March 2016, the company amended the existing revolving credit facility to reduce the aggregate principal amount of commitments from $4 billion to $3 billion consistent with lower expected commercial paper borrowings.


The Term Loan Facility and the amended revolving credit facility contain customary representations and warranties, affirmative and negative covenants, and events of default that are typical for companies with similar credit ratings and generally consistent with those applicable to DuPont’s long-term public debt. The Term Loan Facility and the amended revolving credit facility contain a financial covenant requiring that the ratio of Total Indebtedness to Total Capitalization for DuPont and its consolidated subsidiaries not exceed 0.6667. At December 31, 2016, the company was in compliance with this financial covenant.


38


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ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued

The Term Loan Facility and the amended revolving credit facility impose additional affirmative and negative covenants on DuPont and its subsidiaries after the closing of the proposed merger with Dow, subject to certain limitations, including to:

not sell, lease or otherwise convey to DowDupont, its shareholders or its non-DuPont subsidiaries, any assets or properties of DuPont or its subsidiaries unless the aggregate amount of revenues attributable to all such assets and properties so conveyed after the merger does not exceed 30 percent of the consolidated revenues of DuPont and its subsidiaries as of December 31, 2015 (the Disposition Limitation); and
not guarantee any indebtedness or other obligations of DowDuPont, Dow or ther respective subsidiaries (other than of DuPont and its subsidiaries).

The Term Loan Facility and the amended revolving credit facility will terminate, and the loans and other amounts thereunder would become due and payable, upon the sale, transfer, lease or other disposition of all or substantially all of the assets of the Agriculture line of businesses to DowDuPont, its shareholders or any of its non-DuPont subsidiaries.

In February 2016, in line with seasonal agricultural working capital requirements, the company entered into a committed receivable repurchase facility of up to $1 billion (the 2016 repurchase facility) that expired on November 30, 2016. Under the facility, the company sold a portfolio of available and eligible outstanding customer notes receivables within the Agriculture segment to participating institutions and simultaneously agreed to repurchase at a future date. In January 2017, the company entered into a new committed receivable repurchase facility of up to $1.3 billion (the 2017 repurchase facility) which expires on November 30, 2017. The 2017 repurchase facility has substantially similar terms and conditions as the 2016 repurchase facility and includes the 2016 repurchase facility change of control language conformed to the Disposition Limitation covenant described above. See further discussion of the 2017 repurchase facility in Item 9B, Other Information and Note 23 to the Consolidated Financial Statements.

The company's cash, cash equivalents and marketable securities at December 31, 2016 and 2015 are $6.0 billion and $6.2 billion, respectively. Cash, cash equivalents and marketable securities held outside of the U.S. of $5.8 billion and $4.2 billion at December 31, 2016 and 2015, respectively, are generally utilized to fund local operating activities and capital expenditure requirements and are expected to support non-U.S. liquidity needs for the next 12 months and the foreseeable future thereafter. The company expects domestic liquidity needs, for at least the next 12 months and the foreseeable future thereafter, will be met through existing cash, cash equivalents and marketable securities held in the U.S. and the various sources of liquidity discussed above. Therefore, the company believes that it has sufficient sources of domestic liquidity to support its assumption that undistributed earnings at December 31, 2016 can be considered reinvested indefinitely.

(Dollars in millions)
2016
2015
2014
Cash provided by operating activities
$
3,300

$
2,316

$
3,712


Cash provided by operating activities increased $1.0 billion primarily due to a higher earnings contribution of approximately $0.5 billion, lower year-over-year income tax payments and lower working capital.

Cash provided by operating activities decreased $1.4 billion in 2015 compared to 2014 primarily due to the absence of Chemours in the second half of 2015 compared with a full year of results in 2014 for an impact of approximately $1.0 billion and a lower cash earnings contribution from continuing operations of approximately $0.3 billion.

(Dollars in millions)
2016
2015
2014
Cash used for investing activities
$
(1,514
)
$
(1,828
)
$
(337
)

Cash used for investing activities in 2016 decreased by $0.3 billion compared to 2015. The change was primarily due to lower purchases of property, plant and equipment, lower net purchases of marketable securities and higher proceeds from sales of businesses and other assets. This is partially offset by cash outflows relating to foreign currency contract settlements. The absence in 2016 of property, plant and equipment expenditures related to Chemours accounted for $0.2 billion of the reduction.


39


Part II

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued

Cash used for investing activities in 2015 increased by $1.5 billion compared to 2014. The change was primarily due to lower proceeds received from the sale of businesses in 2015 compared to 2014 and increased purchases of marketable securities in 2015 compared to 2014. This was partially offset by lower purchases of property, plant and equipment, mainly due to the absence of Chemours in the second half of 2015 which accounted for $0.3 billion. See Note 19 to the Consolidated Financial Statements for further discussion of marketable securities outstanding at December 31, 2015 and 2014.

Purchases of property, plant and equipment totaled $1.0 billion, $1.6 billion and $2.0 billion in 2016, 2015, and 2014, respectively. The company expects 2017 purchases of property, plant and equipment to be about $1.1 billion.

(Dollars in millions)
2016
2015
2014
Cash used for financing activities
$
(2,328
)
$
(1,823
)
$
(5,074
)

The $0.5 billion increase in cash used for financing activities in 2016 was primarily due to lower borrowings as a result of the prior year distribution of approximately $3.9 billion which Chemours financed through external borrowings and paid to the company prior to its separation. This was partially offset by lower share repurchases and lower dividends paid to stockholders.

The $3.3 billion decrease in cash used for financing activities in 2015 was primarily due to the distribution of Chemours borrowings to the company as part of the separation, partially offset by a reduction in short term borrowings, and an increase in the repurchase of common stock.

Dividends paid to common and preferred shareholders were $1.3 billion, $1.5 billion, and $1.7 billion in 2016, 2015, and 2014, respectively. Dividends per share of common stock were $1.52, $1.72, and $1.84 in 2016, 2015, and 2014, respectively. In January 2017, the Board of Directors declared a first quarter common stock dividend of $0.38 per share. With the first quarter 2017 dividend, the company has paid quarterly consecutive dividends since the company’s first dividend in the fourth quarter 1904.

In the first quarter 2015, DuPont announced its intention to buy back about $4 billion of shares using the distribution proceeds received from Chemours. In connection with the completion of the spin-off of Chemours, the Board of Directors authorized the use of the distribution proceeds to buy back shares of the company's common stock as follows: $2 billion to be purchased and retired by December 31, 2015 with the remainder to be purchased and retired by December 31, 2016. During 2015, the company purchased and retired 35 million shares through a $2 billion accelerated share repurchase (ASR) agreement. The company had limited opportunity to repurchase shares in 2016, primarily due to the planned merger with Dow. However, during 2016, the company purchased and retired 13.2 million shares in the open market at a cost of $916 million. As of January 1, 2017, the authorization under this buyback program has expired.

In January 2014, the company's Board of Directors authorized a $5 billion share buyback plan. During 2014, the company purchased and retired 30.1 million shares for $2 billion under two separate ASR agreements as well as open market purchases. In 2015, the company repurchased and retired 4.6 million shares in the open market for a total cost of $353 million. As a result, the company has completed $2.4 billion of repurchases as of December 31, 2016. There is no required completion date for purchases under this plan.

See Note 16 to the Consolidated Financial Statements for additional information relating to the above share buyback plans.


40


Part II

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued

(Dollars in millions)
2016
2015
2014
Cash provided by operating activities
$
3,300

$
2,316

$
3,712

Purchases of property, plant and equipment
(1,019
)
(1,629
)
(2,020
)
Free cash flow
$
2,281

$
687

$
1,692


Free cash flow is a measurement not recognized in accordance with generally accepted accounting principles in the U.S. (GAAP) and should not be viewed as an alternative to GAAP measures of performance. All companies do not calculate non-GAAP financial measures in the same manner and, accordingly, the company's free cash flow definition may not be consistent with the methodologies used by other companies. The company defines free cash flow as cash provided by operating activities less purchases of property, plant and equipment, and therefore indicates operating cash flow available for payment of dividends, other investing activities and other financing activities. Free cash flow is useful to investors and management to evaluate the company's cash flow and financial performance, and is an integral financial measure used in the company's financial planning process.

For further information relating to the change in cash provided by operating activities, see discussion above under cash provided by operating activities.


41


Part II

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued

Critical Accounting Estimates
The company's significant accounting policies are more fully described in Note 1 to the Consolidated Financial Statements. Management believes that the application of these policies on a consistent basis enables the company to provide the users of the financial statements with useful and reliable information about the company's operating results and financial condition.

The preparation of the Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts, including, but not limited to, receivable and inventory valuations, impairment of tangible and intangible assets, long-term employee benefit obligations, income taxes, restructuring liabilities, environmental matters and litigation. Management's estimates are based on historical experience, facts and circumstances available at the time and various other assumptions that are believed to be reasonable. The company reviews these matters and reflects changes in estimates as appropriate. Management believes that the following represents some of the more critical judgment areas in the application of the company's accounting policies which could have a material effect on the company's financial position, liquidity or results of operations.

Long-term Employee Benefits
Accounting for employee benefit plans involves numerous assumptions and estimates. Discount rate and expected return on plan assets are two critical assumptions in measuring the cost and benefit obligation of the company's pension and other post employment benefit (OPEB) plans. Management reviews these two key assumptions annually as of December 31st. These and other assumptions are updated periodically to reflect the actual experience and expectations on a plan specific basis as appropriate. As permitted by GAAP, actual results that differ from the assumptions are accumulated on a plan by plan basis and to the extent that such differences exceed 10 percent of the greater of the plan's benefit obligation or the applicable plan assets, the excess is amortized over the average remaining service period of active employees.

About 80 percent of the company's benefit obligation for pensions and essentially all of the company's OPEB obligations are attributable to the benefit plans in the U.S. In the U.S. the discount rate is developed by matching the expected cash flow of the benefit plans to a yield curve constructed from a portfolio of high quality fixed-income instruments provided by the plans' actuaries as of the measurement date. Effective in 2016, the company began to measure the service and interest cost components utilizing a full yield curve approach by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. The company made this change as it believes it is a more precise measurement of service and interest costs by improving the correlation between projected benefit cash flows to the corresponding spot yield curve rates. The company considers this a change in estimate, and, accordingly, has accounted for it on a prospective basis. This change does not affect the measure of the total benefit obligation. Historically, the service and interest cost components were estimated utilizing a single weighted-average discount rate derived from the yield curve and cash flow for measurement of the benefit obligation at the beginning of the period. For non-U.S. benefit plans, the company utilizes prevailing long-term high quality corporate bond indices to determine the discount rate, applicable to each country, at the measurement date.

Within the U.S., the company establishes strategic asset allocation percentage targets and appropriate benchmarks for significant asset classes with the aim of achieving a prudent balance between return and risk. Strategic asset allocations in other countries are selected in accordance with the laws and practices of those countries. Where appropriate, asset-liability studies are also taken into consideration. The long-term expected return on plan assets in the U.S. is based upon historical real returns (net of inflation) for the asset classes covered by the investment policy, expected performance, and projections of inflation and interest rates over the long-term period during which benefits are payable to plan participants. Consistent with prior years, the long-term expected return on plan assets in the U.S. reflects the asset allocation of the plan and the effect of the company's active management of the plan's assets.


42


Part II

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued

In determining annual expense for the principal U.S. pension plan, the company uses a market-related value of assets rather than its fair value. The market-related value of assets is calculated by averaging market returns over 36 months. Accordingly, there may be a lag in recognition of changes in market valuation. As a result, changes in the fair value of assets are not immediately reflected in the company's calculation of net periodic pension cost. The following table shows the market-related value and fair value of plan assets for the principal U.S. pension plan:
(Dollars in billions)
2016 1
2015
2014
Market-related value of assets
$
13.5

$
15.1

$
15.9

Fair value of plan assets 
13.5

14.4

15.8

1. 
During 2016, the plan's trust fund paid about $550 million to a group of separated, vested plan participants who elected a limited-time opportunity to receive a lump sum payout. See further discussion under "Long Term Employee Benefits" beginning on page 47.

For plans other than the principal U.S. pension plan, pension expense is determined using the fair value of assets.

The following table highlights the potential impact on the company's pre-tax earnings due to changes in certain key assumptions with respect to the company's pension and OPEB plans, based on assets and liabilities at December 31, 2016:
Pre-tax Earnings Benefit (Charge)
(Dollars in millions)
1/2 Percentage
Point
Increase
1/2 Percentage
Point
Decrease
Discount rate
$
51

$
(55
)
Expected rate of return on plan assets
80

(80
)
In October 2014, the Society of Actuaries released final reports of new mortality tables and a mortality improvement scale for measurement of retirement program obligations in the U.S. The Society of Actuaries published other mortality improvement scales in October 2015 and October 2016. The company adopted these tables in measuring the 2015 and 2016 long-term employee benefit obligations, respectively. The effect of these adoptions is amortized into net periodic benefit cost for the years following the adoption.

Additional information with respect to pension and OPEB expenses, liabilities and assumptions is discussed under "Long-term Employee Benefits" beginning on page 47 and in Note 17 to the Consolidated Financial Statements.

Environmental Matters
DuPont accrues for remediation activities when it is probable that a liability has been incurred and a reasonable estimate of the liability can be made. The company has recorded a liability of $457 million as of December 31, 2016; these accrued liabilities exclude claims against third parties and are not discounted. As remediation activities vary substantially in duration and cost from site to site, it is difficult to develop precise estimates of future site remediation costs. The company's estimates are based on a number of factors, including the complexity of the geology, the nature and extent of contamination, the type of remedy, the outcome of discussions with regulatory agencies and other Potentially Responsible Parties (PRPs) at multi-party sites and the number of and financial viability of other PRPs. Therefore, considerable uncertainty exists with respect to environmental remediation costs and, under adverse changes in circumstances, the potential liability may range up to $900 million above the amount accrued as of December 31, 2016.


43


Part II

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued

Legal Contingencies
The company's results of operations could be affected by significant litigation adverse to the company, including product liability claims, patent infringement and antitrust claims, and claims for third party property damage or personal injury stemming from alleged environmental torts. The company records accruals for legal matters when the information available indicates that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Management makes adjustments to these accruals to reflect the impact and status of negotiations, settlements, rulings, advice of counsel and other information and events that may pertain to a particular matter. Predicting the outcome of claims and lawsuits and estimating related costs and exposure involves substantial uncertainties that could cause actual costs to vary materially from estimates. In making determinations of likely outcomes of litigation matters, management considers many factors. These factors include, but are not limited to, the nature of specific claims including unasserted claims, the company's experience with similar types of claims, the jurisdiction in which the matter is filed, input from outside legal counsel, the likelihood of resolving the matter through alternative dispute resolution mechanisms and the matter's current status. Considerable judgment is required in determining whether to establish a litigation accrual when an adverse judgment is rendered against the company in a court proceeding. In such situations, the company will not recognize a loss if, based upon a thorough review of all relevant facts and information, management believes that it is probable that the pending judgment will be successfully overturned on appeal. A detailed discussion of significant litigation matters is contained in Note 15 to the Consolidated Financial Statements.

Indemnification Assets
Pursuant to the Separation Agreement discussed in Note 3 to the Consolidated Financial Statements, the company is indemnified by Chemours against certain litigation, environmental, workers' compensation and other liabilities that arose prior to the separation. The term of this indemnification is indefinite and includes defense costs and expenses, as well as monetary and non-monetary settlements and judgments.  In connection with the recognition of liabilities related to these indemnified matters, the company records an indemnification asset when recovery is deemed probable.  In assessing the probability of recovery, the company considers the contractual rights under the Separation Agreement and any potential credit risk.  Future events, such as potential disputes related to recovery as well as solvency of Chemours, could cause the indemnification assets to have a lower value than anticipated and recorded. The company evaluates the recovery of the indemnification assets recorded when events or changes in circumstances indicate the carrying values may not be fully recoverable.  

Income Taxes
The breadth of the company's operations and the global complexity of tax regulations require assessments of uncertainties and judgments in estimating taxes the company will ultimately pay. The final taxes paid are dependent upon many factors, including negotiations with taxing authorities in various jurisdictions, outcomes of tax litigation and resolution of disputes arising from federal, state and international tax audits in the normal course of business. The resolution of these uncertainties may result in adjustments to the company's tax assets and tax liabilities. It is reasonably possible that net reductions to the company’s global unrecognized tax benefits could be in the range of $70 million to $90 million within the next 12 months with the majority due to the settlement of uncertain tax positions with various tax authorities.

Deferred income taxes result from differences between the financial and tax basis of the company's assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Significant judgment is required in evaluating the need for and magnitude of appropriate valuation allowances against deferred tax assets. The realization of these assets is dependent on generating future taxable income, as well as successful implementation of various tax planning strategies. For example, changes in facts and circumstances that alter the probability that the company will realize deferred tax assets could result in recording a valuation allowance, thereby reducing the deferred tax asset and generating a deferred tax expense in the relevant period. In some situations these changes could be material.

At December 31, 2016, the company had a net deferred tax asset balance of $2.9 billion, net of valuation allowance of $1.3 billion. Realization of these assets is expected to occur over an extended period of time. As a result, changes in tax laws, assumptions with respect to future taxable income, and tax planning strategies could result in adjustments to these assets. See Note 6 to the Consolidated Financial Statements for additional details related to the deferred tax asset balance.


44


Part II

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued

Valuation of Assets
The assets and liabilities of acquired businesses are measured at their estimated fair values at the dates of acquisition. The excess of the purchase price over the estimated fair value of the net assets acquired, including identified intangibles, is recorded as goodwill. The determination and allocation of fair value to the assets acquired and liabilities assumed is based on various assumptions and valuation methodologies requiring considerable management judgment, including estimates based on historical information, current market data and future expectations. The principal assumptions utilized in the company's valuation methodologies include revenue growth rates, operating margin estimates, royalty rates, and discount rates. Although the estimates are deemed reasonable by management based on information available at the dates of acquisition, those estimates are inherently uncertain.

Assessment of the potential impairment of goodwill, other intangible assets, property, plant and equipment, and investments in affiliates and other assets is an integral part of the company's normal ongoing review of operations. Testing for potential impairment of these assets is significantly dependent on numerous assumptions and reflects management's best estimates at a particular point in time. The dynamic economic environments in which the company's diversified businesses operate, and key economic and business assumptions with respect to projected selling prices, market growth and inflation rates, can significantly affect the outcome of impairment tests. Estimates based on these assumptions may differ significantly from actual results. Changes in factors and assumptions used in assessing potential impairments can have a significant impact on the existence and magnitude of impairments, as well as the time in which such impairments are recognized. In addition, the company continually reviews its diverse portfolio of assets to ensure they are achieving their greatest potential and are aligned with the company's growth strategy. Strategic decisions involving a particular group of assets may trigger an assessment of the recoverability of the related assets. Such an assessment could result in impairment losses.

Based on the results of the company's annual goodwill impairment test, completed in the third quarter 2016, we determined that the fair value of each of the reporting units exceeded its carrying value by more than 20 percent, and therefore there were no indications of impairment. The company's methodology for estimating the fair value of its reporting units is using the income approach based on the present value of future cash flows. The income approach has been generally supported by additional market transaction analyses. There can be no assurance that the company's estimates and assumptions regarding forecasted cash flow, revenue and operating income growth rates made for purposes of the annual goodwill impairment test will prove to be accurate predictions of the future. The company believes the current assumptions and estimates utilized are both reasonable and appropriate.

During 2016, the company recorded a $158 million impairment charge related to indefinite-lived intangible trade names within the Industrial Biosciences segment as a result of the realignment of brand marketing strategies and a determination to phase out the use of certain acquired trade names. See Note 4 to the Consolidated Financial Statements for additional details related to this charge.

During 2016, the company recorded an asset impairment charge of $435 million related to its uncompleted ERP system.  The company intends to complete the ERP system project, however, given the uncertainties related to timing as well as potential developments and changes to technologies in the market place at the time of restart, use of the ERP system can no longer be considered probable. See Note 4 to the Consolidated Financial Statements for additional details related to this charge.


45


Part II

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued

Off-Balance Sheet Arrangements
Certain Guarantee Contracts
Information with respect to the company's guarantees is included in Note 15 to the Consolidated Financial Statements. Historically, the company has not had to make significant payments to satisfy guarantee obligations; however, the company believes it has the financial resources to satisfy these guarantees.

Contractual Obligations
Information related to the company's significant contractual obligations is summarized in the following table:
 
 
Payments Due In
(Dollars in millions)
Total at
December 31,
2016
2017
2018 -
 2019
2020 -
 2021
2022 and
beyond
Long-term debt obligations1
$
8,137

$
4

$
2,327

$
2,506

$
3,300

Expected cumulative cash requirements
     for interest payments through maturity
2,875

351

561

333

1,630

Capital leases1
9


2

3

4

Operating leases
1,203

263

440

281

219

Purchase obligations2
 

 

 

 

 

Information technology infrastructure & services
187

93

92

2


Raw material obligations3
1,070

480

289

202

99

Utility obligations
125

105

14

4

2

License agreements4
1,456

281

462

366

347

Other
122

79

23

15

5

Total purchase obligations
2,960

1,038

880

589

453

Other liabilities1,5,6
 

 

 

 

 

Workers' compensation
86

15

37

16

18

Environmental remediation
457

165

137

80

75

Legal settlements
17

6

4

4

3

Other7
153

43

25

19

66

Total other long-term liabilities
713

229

203

119

162

Total contractual obligations8
$
15,897

$
1,885

$
4,413

$
3,831

$
5,768


1. 
Included in the Consolidated Financial Statements.
2. 
Represents enforceable and legally binding agreements in excess of $1 million to purchase goods or services that specify fixed or minimum quantities; fixed, minimum or variable price provisions; and the approximate timing of the agreement.
3. 
Includes raw material obligations related to supply agreements with Koch Industries, Inc. (INVISTA).
4. 
Represents remaining minimum payments under DuPont Pioneer license agreements.
5. 
Pension and OPEB obligations have been excluded from the table above. Expected 2017 funding for the principal U.S. pension plan and non-U.S. plans with plan assets is disclosed below within Long Term Employee Benefits. Contributions beyond 2017 are expected to be made, however, the amount of contributions are dependent on the future economic environment, investment returns on pension trust assets, as well as rules and regulations of the respective country in which the plans operate.  The company’s remaining pension plans with no plan assets and other post employment benefit plans are paid from operating cash flows. The benefit payments for these plans are excluded from the table above as the timing and amounts of benefit payments are uncertain. The estimated benefit payments in 2017 for these plans are disclosed below within Long Term Employee Benefits. Refer to Note 17 to the Consolidated Financial Statements for further information regarding the pension and other post employment benefit plans.
6. 
The company's contractual obligations do not reflect an offset for recoveries associated with indemnifications by Chemours in accordance with the Separation Agreement. Refer to Notes 3 and 15 to the Consolidated Financial Statements for additional detail related to the indemnifications.
7. 
Primarily represents employee-related benefits other than pensions and other post employment benefits.
8. 
Due to uncertainty regarding the completion of tax audits and possible outcomes, the timing of certain payments of obligations related to unrecognized tax benefits cannot be made and have been excluded from the table above. See Note 6 to the Consolidated Financial Statements for additional detail.

The company expects to meet its contractual obligations through its normal sources of liquidity and believes it has the financial resources to satisfy these contractual obligations.


46


Part II

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued

Long-term Employee Benefits
The company has various obligations to its employees and retirees. The company maintains retirement-related programs in many countries that have a long-term impact on the company's earnings and cash flows. These plans are typically defined benefit pension plans, as well as medical, dental and life insurance benefits for pensioners and survivors and disability benefits for employees (other post employment benefits or OPEB plans). Approximately 80 percent of the company's worldwide benefit obligation for pensions and essentially all of the company's worldwide OPEB obligations are attributable to the U.S. benefit plans.

Pension coverage for employees of the company's non-U.S. consolidated subsidiaries is provided, to the extent deemed appropriate, through separate plans. The company regularly explores alternative solutions to meet its global pension obligations in the most cost effective manner possible as demographics, life expectancy and country-specific pension funding rules change. Where permitted by applicable law, the company reserves the right to change, modify or discontinue its plans that provide pension, medical, dental, life insurance and disability benefits.

Benefits under defined benefit pension plans are based primarily on years of service and employees' pay near retirement. In November 2016, the company announced changes to the U.S. pension and OPEB plans. The company will freeze the pay and service amounts used to calculate pension benefits for active employees who participate in the U.S. pension plans at the earlier of the effective date of the first of the Intended Business Separations or November 30, 2018 (the Effective Date). See further discussion of the Intended Business Separations under "DuPont Dow Merger of Equals" beginning on page 2. Therefore, as of the Effective Date, active employees in the U.S. plans will not accrue additional benefits for future service and eligible compensation received. In addition to the changes to the U.S. pension plans, eligible employees who will be under the age of 50 at the Effective Date will not receive post-retirement medical, dental and life insurance benefits. As a result of these changes, the company recognized a pre-tax curtailment gain of $382 million during the fourth quarter of 2016. The majority of employees hired in the U.S. on or after January 1, 2007 are not eligible to participate in the pension and post-retirement medical, dental and life insurance plans, but receive benefits in the defined contribution plans.
In the fourth quarter 2016, about $550 million of lump-sum payments were made from the principal U.S. pension plan trust fund to a group of separated, vested plan participants who were extended a limited-time opportunity and voluntarily elected to receive their pension benefits in a single lump-sum payment.

Pension benefits are paid primarily from trust funds established to comply with applicable laws and regulations. Unless required by law, the company does not make contributions that are in excess of tax deductible limits. The actuarial assumptions and procedures utilized are reviewed periodically by the plans' actuaries to provide reasonable assurance that there will be adequate funds for the payment of benefits. The company contributed $230 million to the principal U.S. pension plan in 2016 and the company expects to contribute about the same amount to this plan in 2017.
Funding for each pension plan other than the principal U.S. pension plan is governed by the rules of the sovereign country in which it operates. Thus, there is not necessarily a direct correlation between pension funding and pension expense. In general, however, improvements in plans' funded status tends to moderate subsequent funding needs. The company contributed $121 million to its pension plans other than the principal U.S. pension plan in 2016.

U.S. pension benefits that exceed federal limitations are covered by separate unfunded plans and these benefits are paid to pensioners and survivors from operating cash flows. The company's remaining pension plans with no plan assets are paid from operating cash flows. The company made benefit payments of $184 million to its unfunded plans in 2016.

The company's OPEB plans are unfunded and the cost of the approved claims is paid from operating cash flows. Pre-tax cash requirements to cover actual net claims costs and related administrative expenses were $218 million, $237 million and $233 million for 2016, 2015 and 2014, respectively. Changes in cash requirements reflect the net impact of higher per capita health care costs, demographic changes, plan amendments and changes in participant premiums, co-pays and deductibles.

In 2017, the company expects to contribute $95 million for pension plans other than the principal U.S. pension plan, $85 million to its remaining plans with no plan assets, and $275 million for its OPEB plans.


47


Part II

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued

The company's income can be significantly affected by pension and defined contribution benefits as well as OPEB costs. The following table summarizes the extent to which the company's income over each of the last 3 years was affected by pre-tax charges related to long-term employee benefits:
(Dollars in millions)
2016
2015
2014
Long-term employee benefit plan charges 1
$
442

$
616

$
715


1.The long-term employee benefit plan charges include discontinued operations of $(5), $(245) and $96 for 2016, 2015 and 2014, respectively.

The above charges for pension and OPEB are determined as of the beginning of each year. The decrease in long-term employee benefit expense in 2016 is driven by the curtailment gain recognized in 2016 related to the changes to the U.S. long term employee benefits described above. The decrease in 2015 is primarily due to a curtailment gain, which is presented within income from discontinued operations, partially offset by a decrease in discount rate. See "Long-term Employee Benefits" under the Critical Accounting Estimates section beginning on page 42 of this report for additional information on determining annual expense.

The company's key assumptions used in calculating its pension and other post employment benefits are the expected return on plan assets, the rate of compensation increases and the discount rate (see Note 17 to the Consolidated Financial Statements). For 2017, long term employee benefit expense from continuing operations is expected to increase by about $340 million mainly due to the curtailment gain recognized in 2016. This amount does not include any potential settlement charges related to the company's Pension Restoration Plan which provides lump sum payments to certain eligible retirees.

Environmental Matters
The company operates global manufacturing, product handling and distribution facilities that are subject to a broad array of environmental laws and regulations. Such rules are subject to change by the implementing governmental agency, and the company monitors these changes closely. Company policy requires that all operations fully meet or exceed legal and regulatory requirements. In addition, the company implements voluntary programs to reduce air emissions, minimize the generation of hazardous waste, decrease the volume of water use and discharges, increase the efficiency of energy use and reduce the generation of persistent, bioaccumulative and toxic materials. Management has noted a global upward trend in the amount and complexity of proposed chemicals regulation. The costs to comply with complex environmental laws and regulations, as well as internal voluntary programs and goals, are significant and will continue to be significant for the foreseeable future.
 
Pre-tax environmental expenses charged to income from continuing operations are summarized below:
(Dollars in millions)
2016
2015
2014
Environmental operating costs
$
370

$
380

$
380

Environmental remediation costs
60

65

35

            
$
430

$
445

$
415


About 75 percent of total pre-tax environmental expenses charged to income from continuing operations in 2016 resulted from operations in the U.S. Based on existing facts and circumstances, management does not believe that year over year changes, if any, in environmental expenses charged to current operations will have a material impact on the company's financial position, liquidity or results of operations. Annual expenditures in the near term are not expected to vary significantly from the range of such expenditures experienced in the past few years. Longer term, expenditures are subject to considerable uncertainty and may fluctuate significantly.

Environmental Operating Costs
As a result of its operations, the company incurs costs for pollution abatement activities including waste collection and disposal, installation and maintenance of air pollution controls and wastewater treatment, emissions testing and monitoring, and obtaining permits. The company also incurs costs related to environmental related research and development activities including environmental field and treatment studies as well as toxicity and degradation testing to evaluate the environmental impact of products and raw materials.


48


Part II

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued

Remediation Accrual
Changes in the remediation accrual balance are summarized below:
(Dollars in millions)
 
Balance at December 31, 2014
$
478

Remediation payments1
(104
)
Net increase in remediation accrual2
118

Balance at December 31, 2015
$
492

Remediation payments1
(143
)
Net increase in remediation accrual2
108

Balance at December 31, 2016
$
457

1.    Includes reductions in the accrual for payments made by indemnified parties. See below for further discussion.
2.     Excludes related indemnification asset. See below for further discussion.

Considerable uncertainty exists with respect to environmental remediation costs, and, under adverse changes in circumstances, the potential liability may range up to $900 million above the amount accrued as of December 31, 2016. However, based on existing facts and circumstances, management does not believe that any loss, in excess of amounts accrued, related to remediation activities at any individual site will have a material impact on the financial position, liquidity or results of operations of the company.

Pursuant to the Separation Agreement discussed in Note 3 to the Consolidated Financial Statements, the company is indemnified by Chemours for certain environmental matters, included in the liability of $457 million, that have an estimated liability of $250 million as of December 31, 2016 and a potential exposure that ranges up to approximately $500 million above the amount accrued. As such, the company has recorded an indemnification asset of $250 million corresponding to the company's accrual balance related to these matters at December 31, 2016. Within the table above, during 2016, the remediation payments made by Chemours are about $90 million and the indemnified portion of the net increase in the remediation accrual is about $50 million.

On December 15, 2016, DuPont reached a settlement in principle, valued at about $50 million, with the U.S. Departments of Justice and the Interior and the Commonwealth of Virginia, to resolve remediation claims associated with mercury contamination in the South River and South Fork Shenandoah River watershed. If approved by the U.S. District Court for the Western District of Virginia, the settlement requires DuPont to make a cash payment of about $42 million and undertake certain remediation activities. The full value of the settlement is included in the remediation accrual balance at December 31, 2016.

As of December 31, 2016, the company has been notified of potential liability under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA or Superfund) or similar state laws at about 500 sites around the U.S., including approximately 100 sites for which DuPont does not believe it has liability based on current information. Active remediation is under way at approximately 90 of these sites. In addition, the company has resolved its liability at approximately 70 sites, either by completing remedial actions with other PRPs or by participating in "de minimis buyouts" with other PRPs whose waste, like the company's, represented only a small fraction of the total waste present at a site. The company received notice of potential liability at one new site during 2016 compared with one and three similar notices in 2015 and 2014, respectively.

Environmental Capital Expenditures
Capital expenditures for environmental projects, either required by law or necessary to meet the company’s internal environmental goals, were $39 million in 2016. The company currently estimates expenditures for environmental-related capital projects to be about $55 million in 2017.


49


Part II

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued

Climate Change
The company believes that climate change is an important global issue that presents risks and opportunities. Expanding upon significant global greenhouse gas (GHG) emissions and other environmental footprint reductions made in the period 1990-2010, as of 2015 the company reduced its environmental footprint, achieving reductions of 7.5 percent in GHG emissions, 7.6 percent in water consumption, and 3.3 percent in energy intensity from non-renewable resources versus a 2010 baseline. In 2015, the company announced its 2020 Sustainability Goals, including a goal to achieve a 7 percent reduction in GHG emissions intensity (2015 baseline) and continuation of its goal to achieve a 10 percent improvement in energy intensity (2010 baseline). The company continuously evaluates opportunities for existing and new product and service offerings in light of the anticipated demands of a low-carbon economy.

The company is actively engaged in efforts to develop constructive public policies to reduce GHG emissions and encourage lower carbon forms of energy. Such policies may bring higher operating costs as well as greater revenue and margin opportunities. Legislative efforts to control or limit GHG emissions could affect the company's energy source and supply choices as well as increase the cost of energy and raw materials derived from fossil fuels. Such efforts are also anticipated to provide the business community with greater certainty for the regulatory future, help guide investment decisions, and drive growth in demand for low-carbon and energy-efficient products, technologies, and services. Similarly, demand is expected to grow for products that facilitate adaptation to a changing climate. However, the current unsettled policy environment in the U.S., where many company facilities are located, adds an element of uncertainty to business decisions, particularly those relating to long-term capital investments.

In addition, significant differences in regional or national approaches could present challenges in a global marketplace. An effective global climate policy framework will help drive the market changes that are needed to stimulate and efficiently deploy new innovations in science and technology, while maintaining open and competitive global markets.


50


Part II
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



The company’s global operations are exposed to financial market risks relating to fluctuations in foreign currency exchange rates, commodity prices, and interest rates. The company has established a variety of programs including use of derivative instruments and other financial instruments to manage the exposure to financial market risks as to minimize volatility of financial results. In the ordinary course of business, the company enters into derivative instruments to hedge its exposure to foreign currency, interest rate and commodity price risks under established procedures and controls. For additional information on these derivatives and related exposures, see Note 19 to the Consolidated Financial Statements. Decisions regarding whether or not to hedge a given commitment are made on a case-by-case basis, taking into consideration the amount and duration of the exposure, market volatility and economic trends. Foreign currency exchange contracts are also used, from time to time, to manage near-term foreign currency cash requirements.

Foreign Currency Exchange Rate Risks
The company has significant international operations resulting in a large number of currency transactions that result from international sales, purchases, investments and borrowings. The primary currencies for which the company has an exchange rate exposure are the European euro (EUR), Chinese yuan, Brazilian real, and Japanese yen. The company uses forward exchange contracts to offset its net exposures, by currency, related to the foreign currency denominated monetary assets and liabilities of its operations. In addition to the contracts disclosed in Note 19 to the Consolidated Financial Statements, from time to time, the company will enter into foreign currency exchange contracts to establish with certainty the U.S. dollar (USD) amount of future firm commitments denominated in a foreign currency.

Certain foreign entities of the company held USD denominated marketable securities, mainly US government securities, at December 31, 2015. The USD/EUR was the primary foreign exchange exposure for these nonfunctional currency denominated marketable securities. These marketable securities were classified as “available-for-sale” and as such, fluctuations in foreign exchange were recorded in accumulated other comprehensive loss (AOCL) within the Consolidated Statements of Equity. These fluctuations were subsequently reclassified from AOCL to earnings in the period in which the marketable securities were sold.

The following table illustrates the fair values of outstanding foreign currency contracts and nonfunctional currency denominated marketable securities at December 31, 2016 and 2015, and the effect on fair values of a hypothetical adverse change in the foreign exchange rates that existed at December 31, 2016 and 2015. The sensitivities for foreign currency contracts and nonfunctional currency denominated marketable securities are based on a 10 percent adverse change in foreign exchange rates.
 
Fair Value
Asset/(Liability)
Fair Value
Sensitivity
(Dollars in millions)
2016
2015
2016
2015
Foreign currency contracts
$
61

$
(6
)
$
(567
)
$
(738
)
Marketable securities

788


(110
)

Since the company's risk management programs are highly effective, the potential loss in value for each risk management portfolio described above would be largely offset by changes in the value of the underlying exposure.

Concentration of Credit Risk
The company maintains cash and cash equivalents, marketable securities, derivatives and certain other financial instruments with various financial institutions. These financial institutions are generally highly rated and geographically dispersed and the company has a policy to limit the dollar amount of credit exposure with any one institution.

As part of the company's financial risk management processes, it continuously evaluates the relative credit standing of all of the financial institutions that service DuPont and monitors actual exposures versus established limits. The company has not sustained credit losses from instruments held at financial institutions.

The company's sales are not materially dependent on any single customer. As of December 31, 2016, no one individual customer balance represented more than five percent of the company's total outstanding receivables balance. Credit risk associated with its receivables balance is representative of the geographic, industry and customer diversity associated with the company's global businesses.

The company also maintains strong credit controls in evaluating and granting customer credit. As a result, it may require that customers provide some type of financial guarantee in certain circumstances. Length of terms for customer credit varies by industry and region.

51


Part II
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplementary data required by this Item are included herein, commencing on page F-1 of this report.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.  CONTROLS AND PROCEDURES

The company maintains a system of disclosure controls and procedures to give reasonable assurance that information required to be disclosed in the company's reports filed or submitted under the Securities Exchange Act of 1934 (Exchange Act) is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. These controls and procedures also give reasonable assurance that information required to be disclosed in such reports is accumulated and communicated to management to allow timely decisions regarding required disclosures.

As of December 31, 2016, the company's Chief Executive Officer (CEO) and Chief Financial Officer (CFO), together with management, conducted an evaluation of the effectiveness of the company's disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on that evaluation, the CEO and CFO concluded that these disclosure controls and procedures are effective.

There has been no change in the company's internal control over financial reporting that occurred during the fourth quarter of 2016 that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting. The company has completed its evaluation of its internal controls and has concluded that the company's system of internal controls over financial reporting was effective as of December 31, 2016 (see page F-2).

ITEM 9B.  OTHER INFORMATION

On January 31, 2017, the company entered into a committed receivable repurchase facility of up to $1.3 billion (the 2017 repurchase facility) that expires on November 30, 2017. Under the 2017 repurchase facility, the company may sell a portfolio of available and eligible outstanding customer notes receivables within the Agriculture segment to participating institutions and simultaneously agree to repurchase at a future date. The 2017 repurchase facility is considered a secured borrowing with the customer notes receivables, inclusive of those that are sold and repurchased, equal to 105 percent of the outstanding amounts borrowed utilized as collateral. Borrowings under the repurchase facility will have an interest rate of LIBOR + 0.75 percent.

52


Part III

ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information with respect to this Item is incorporated herein by reference to the Proxy, including information within the sections entitled, "Election of Directors," "Governance of the Company-Committees of the Board," "Governance of the Company-Committee Membership," "Section 16(a) Beneficial Ownership Reporting Compliance," and “Stockholder Nominations for Election of Directors.”

The company has adopted a Code of Ethics for its CEO, CFO, and Controller that may be accessed from the company's website at www.dupont.com by clicking on "Investors" and then "Corporate Governance." Any amendments to, or waiver from, any provision of the code will be posted on the company's website at the above address.

Executive Officers of the Registrant
The following is a list, as of February 2, 2017, of the company's Executive Officers:
 
Age
Executive
Officer
Since
Chair of the Board of Directors and Chief Executive Officer:
 
 
Edward D. Breen
60
2015
Other Executive Officers:
 
 
Benito Cachinero-Sánchez
58
2011
Senior Vice President - Human Resources
 
 
James C. Collins
54
2014
Executive Vice President
 
 
C. Marc Doyle
47
2015
Executive Vice President
 
 
Nicholas C. Fanandakis
60
2009
Executive Vice President and Chief Financial Officer
 
 
Stacy L. Fox
63
2014
Senior Vice President and General Counsel
 
 
Douglas Muzyka
62
2014
Senior Vice President and Chief Science & Technology Officer
 
 

The company's Executive Officers are elected or appointed for the ensuing year or for an indefinite term and until their successors are elected or appointed.

Edward D. Breen joined the DuPont Board of Directors in February 2015, was named Interim Chair of the Board and CEO in October 2015, and assumed his current role in November 2015.  Mr. Breen served as Chairman and CEO of Tyco International plc (Tyco) from July 2002 until September 2012.  Prior to joining Tyco, Mr. Breen held several senior management positions at Motorola from 2000 to 2002, including as President and Chief Operating Officer.  From December 1997 to January 2000, he served as Chairman, President and Chief Executive Officer of General Instrument Corporation.  Between 1994 and 1997, Mr. Breen was president of the Broadband Networks Group for General Instrument, President of Eastern Operations for the Communications Division and served as Executive Vice President of Terrestrial Systems.  Mr. Breen currently serves as a director of Comcast Corporation. He also serves as a member of the advisory board of New Mountain Capital LLC, a private equity firm.
Benito Cachinero-Sánchez joined DuPont in April 2011 as Senior Vice President - Human Resources. Prior to joining DuPont, he was Corporate Vice President of Human Resources at Automatic Data Processing (ADP). Prior to ADP, he was Vice President, Human Resources for the Medical Devices & Diagnostics Group of Johnson & Johnson.


53


Part III
ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE, continued

James C. Collins joined DuPont in 1984 as an engineer.  He has held positions in engineering, supervision and plant management at a variety of manufacturing sites.  In 1993, he joined the Agriculture Sales & Marketing Group where he served in a variety of roles across the globe supporting DuPont’s seed and crop protection businesses.  From 2004 to 2010, he was responsible for DuPont Crop Protection as Vice President and General Manager and then President.  In January 2011, he was appointed Vice President for Acquisition & Integration of Danisco, and was named President of DuPont Industrial Biosciences in May of that year.  Beginning in September 2013, he assumed additional business and functional responsibilities as Senior Vice President.  In December 2014, he was named Executive Vice President and had responsibility for the Electronics & Communications, Industrial Biosciences, Performance Materials segments as well as regional management for Europe, Middle East, Africa and Canada and Corporate Communications.   In January 2016, Mr. Collins assumed responsibility for the Agriculture businesses.

C. Marc Doyle joined DuPont in 1995 as a research scientist within DuPont Central Research & Development. He has held positions in business development, marketing and business management, including strategic planning manager, global displays business manager and regional business director of the Asia Pacific region for the Microcircuit Materials business.  In February 2008, he became the Global Business Director for DuPont Photovoltaic Solutions within the DuPont Electronics & Communications business. He was named Global Market and Product Director for DuPont Protection Technologies in September 2011.  In this role, Mr. Doyle had been responsible for the Kevlar® and Nomex® product lines globally.  In June 2013 he was named President of DuPont Protection Technologies. In July 2015, he was named Senior Vice President and assumed responsibility for the Safety & Protection businesses. In January 2016, he was named Executive Vice President and assumed responsibility for the Electronics & Communications, Protection Solutions, Sustainable Solutions, Industrial Biosciences, Nutrition & Health, and Performance Materials businesses.

Nicholas C. Fanandakis joined DuPont in 1979 as an accounting and business analyst. Since then, Mr. Fanandakis served in a variety of plant, marketing, and product management and business director roles. Mr. Fanandakis served as Vice President and General Manager—DuPont Chemical Solutions Enterprise from 2003 until February 2007 when he was named Vice President—Corporate Plans. In January 2008, Mr. Fanandakis was named Group Vice President—DuPont Applied BioSciences. In November 2009, he was named Senior Vice President and Chief Financial Officer. In August 2010, he was named Executive Vice President and Chief Financial Officer.

Stacy L. Fox joined DuPont in October 2014 as Senior Vice President and General Counsel. In January 2016, she assumed responsibility for Corporate Communications. Prior to joining DuPont she served as Deputy Emergency Manager of the City of Detroit. Prior to that role, she was Senior Vice President of Strategy and General Counsel of Sunoco, Inc. She also served as a member of the Board of Directors of Sunoco Partners LLC. Earlier, she served as Executive Vice President of Corporate Transactions and Legal Affairs for Visteon. Ms. Fox is also a founder and principal of the Roxbury Group.

Douglas Muzyka joined the company in 1985 as a research scientist and held a variety of research and research management roles. In 1994, he was named Director of Technology and New Business Development for DuPont Nylon, Asia Pacific. In 1998, he was named Global Business Director for the Nylon Industrial Specialties business. In 2001, Mr. Muzyka was then named President and General Manager of DuPont Mexico. In January 2003, he was named President and Chief Executive Officer of DuPont Canada Inc. and in September 2003, concurrently Vice President and General Manager - DuPont Nutrition & Health. In July 2006, he assumed the role of President - DuPont Greater China. In September 2010, he was named Senior Vice President and Chief Science and Technology Officer. In January 2016, he assumed responsibility for engineering technologies and regional leadership.

ITEM 11.  EXECUTIVE COMPENSATION

Information with respect to this Item is incorporated herein by reference to the Proxy, including information within the sections entitled, "Compensation Discussion and Analysis," "Compensation of Executive Officers," "Directors' Compensation," "Compensation Committee Interlocks and Insider Participation" and "Compensation Committee Report."


54


Part III

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information with respect to this Item is incorporated herein by reference to the Proxy, including information within the section entitled "Ownership of Company Stock."

Securities authorized for issuance under equity compensation plans as of December 31, 2016
(Shares in thousands, except per share)
Plan Category
Number of Securities to
be Issued Upon Exercise
of Outstanding Options,
Warrants and Rights
  
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights2
Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans3
  
Equity compensation plans approved by
    security holders
20,447

1 
$
58.11

36,854

  
Equity compensation plans not
    approved by security holders
13

4 


5 
Total
20,460

  
$
58.11

36,854

  

1. 
Includes stock-settled time-vested and performance-based restricted stock units granted and stock units deferred under the company's Equity and Incentive Plan, Stock Performance Plan, Variable Compensation Plan and the Stock Accumulation and Deferred Compensation Plan for Directors. Performance-based restricted stock units reflect the maximum number of shares to be awarded at the conclusion of the performance cycle (200 percent of the original grant). The actual award payouts can range from 0 to 200 percent of the original grant.
2. 
Represents the weighted-average exercise price of the outstanding stock options only; the outstanding stock-settled time-vested and performance-based restricted stock units and deferred stock units are not included in this calculation.
3. 
Reflects shares available pursuant to the issuance of stock options, restricted stock, restricted stock units or other stock-based awards under the Equity and Incentive Plan, as amended and restated effective March 14, 2016 (see Note 18 to the Consolidated Financial Statements). The maximum number of shares of stock reserved for the grant or settlement of awards under the Equity and Incentive Plan (Share Limit) shall be 110,000 and shall be subject to adjustment as provided therein; provided that each share in excess of 30,000 issued under the Equity and Incentive Plan pursuant to any award settled in stock, other than a stock option or stock appreciation right, shall be counted against the foregoing Share Limit as four and one-half shares for every one share actually issued in connection with such award. (For example, if 32,000 shares of restricted stock are granted under the Equity and Incentive Plan, 39,000 shall be charged against the Share Limit in connection with that award.)
4. 
Includes 13 deferred stock units resulting from base salary and short-term incentive (STIP) deferrals under the Management Deferred Compensation Plan (MDCP). Under the MDCP, a select group of management or highly compensated employees can elect to defer the receipt of their base salary, STIP or Long Term Incentive (LTI) award. LTI deferrals are included in footnote 1 to the above chart. The company does not match deferrals under the MDCP. There are seven core investment options under the MDCP for base salary and STIP deferrals, including deferred stock units with dividend equivalents credited as additional stock units. In general, deferred stock units are distributed in the form of DuPont common stock and may be made in the form of lump sum at a specified future date prior to retirement or a lump sum or annual installments after separation from service. Shareholder approval of the MDCP was not required under the rules of the New York Stock Exchange.
5. 
There is no limit on the number of shares that can be issued under the MDCP and no further shares are available for issuance under the other equity compensation arrangements described in footnote 4 to the above chart.


55


Part III

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information with respect to this Item is incorporated herein by reference to the Proxy, including information within the sections entitled, "Governance of the Company-Review and Approval of Transactions with Related Persons" and "Governance of the Company-Corporate Governance Guidelines," "Governance of the Company-Committees of the Board," "Governance of the Company-Committee Membership" and "Election of Directors."

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information with respect to this Item is incorporated herein by reference to the Proxy, including information within the section entitled "Ratification of Independent Registered Public Accounting Firm."



56


Part IV

ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)
Financial Statements, Financial Statement Schedules and Exhibits:
1.
Financial Statements (See the Index to the Consolidated Financial Statements on page F-1 of this report).
2.
Financial Statement Schedules
Schedule II—Valuation and Qualifying Accounts
(Dollars in millions)
Year Ended December 31,
2016
2015
2014
Accounts Receivable—Allowance for Doubtful Receivables
 

 

 

Balance at beginning of period
$
225

$
235

$
262

Additions charged to expenses
119

58

58

Deductions from reserves1
(57
)
(68
)
(85
)
Balance at end of period
$
287

$
225

$
235

Inventory—Obsolescence Reserve
 
 
 
Balance at beginning of period
$
237

$
180

$
212

Additions charged to expenses
298

391

386

Deductions from reserves2
(320
)
(334
)
(418
)
Balance at end of period
$
215

$
237

$
180

Deferred Tax Assets—Valuation Allowance
 

 

 

Balance at beginning of period
$
1,529

$
1,704

$
1,711

Net benefits to income tax expense
(184
)
(71
)
(47
)
(Deductions) additions to other comprehensive (loss) income
(37
)
(104
)
40

Balance at end of period
$
1,308

$
1,529

$
1,704


1. Deductions include write-offs, recoveries and currency translation adjustments.
2. Deductions include disposals and currency translation adjustments.

Financial Statement Schedules listed under SEC rules but not included in this report are omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or notes thereto incorporated by reference.


57


Part IV
ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES, continued

3.
Exhibits

The following list of exhibits includes both exhibits submitted with this Form 10-K as filed with the SEC and those incorporated by reference to other filings:
Exhibit
Number
 
Description